Directed order

ABSTRACT

A directed order process and related market center are disclosed, wherein a market center grants permission to order sending firms to send directed order flow to participating designated market makers. Such designated market makers create a virtual guarantee order book for each permissioned order sending firm. If an order sending firm sends a directed order to the market center that is marketable against a virtual guarantee order, then the market center automatically pairs the orders in a two-sided directed cross order instruction, which executes against any superior trading interest in the marketplace first before crossing.

TECHNICAL FIELD

The disclosure relates generally to the field of electronic tradingmethods and systems and in particular to directed order processing in anelectronic trading environment.

BACKGROUND

Market centers have utilized directed orders, also known as preferencedorders, for some time. Directed orders are orders that are sent to amarket center with instructions that a specific market maker act as acontra party in executing a cross with the directed order. In priorsystems, the directed order process was typically not integrated withthe non-directed (or auction) process. In such directed order systems,the market maker that received a directed order could reject the order,execute it or respond with a counter-offer. Such systems are negotiationsystems and because they were not integrated with the non-directed orderprocess, directed orders in such systems executed without regard to theprice-time priority of orders in the non-directed process. This had theunfavorable effect of having directed orders often trading at pricesinferior to the market. In such systems, non-directed limit orders thathad price and/or time priority were bypassed.

Other prior directed order systems were set up to take account ofpresent orders in the non-directed order process, but such systems didnot allow directed orders to interact with the non-directed orderprocess. Instead, for the directed order to execute in such systems, ithad to improve the order book for the market center that received thedirected order and it also had to be priced at or better than thenational best bid or offer (“NBBO”). Such prior systems forced adirected order to execute cleanly without marketplace interaction, asthe directed order would not execute otherwise. In such systems, becausea market maker was obligated to unconditionally improve the price of themarket to execute with such directed orders, many market makers refusedto accept directed orders.

Accordingly, there is a need for a directed order processing system thatis integrated with and interacts with the non-directed order process,thereby preventing directed orders from executing at inferior prices.Additionally, there is a need for a directed order processing systemthat provides market makers with more flexibility in regard tospecifying the prices and sizes at which they are willing to interactwith incoming directed order flow. Additionally, there is a need for adirected order processing system that does not divulge the presence of,nor identify the senders of, such incoming directed order flow, thuspreventing such orders from being seen or declined.

SUMMARY

According to an aspect of the present disclosure, a method includesproviding a posting market center having an internal book and having aguarantee order book populated with a plurality of guarantee orders. Themethod further includes receiving a directed order on the posting marketcenter and retrieving a marketable contra side guarantee order from theplurality of guarantee orders on the guarantee order book and pairingthe received directed order with the retrieved guarantee order.

The method further includes ranking the retrieved guarantee order in theinternal book; presenting the received directed order to the internalbook; and matching the received directed order with the retrievedguarantee order in price and time priority on the internal book, wherebythe received directed order interacts with the internal book and doesnot cross at a price that trades through the market.

DESCRIPTION OF THE DRAWINGS

These and other features, aspects and advantages of the presentdisclosure will become better understood with regard to the followingdescription, appended claims and accompanying drawings where:

FIG. 1A is a block diagram illustrating the trading environment in whichan embodiment of the present disclosure operates;

FIG. 1B illustrates an overview of the architecture involved in thedirected order process;

FIG. 2 is an exemplary designated market maker/order sending firmpermissions table;

FIGS. 3A-3B illustrate guarantee buy order and guarantee sell ordervalidation processes;

FIGS. 4A-4B illustrate processes for updating pegged guarantee buy andsell orders;

FIG. 5 illustrates a process to check whether an incoming directed orderhas permission to trade with a designated market maker;

FIGS. 6A-6B illustrate processes for determining if directed buy andsell order can trade;

FIG. 7 is an exemplary illustration of how a directed order that hasbeen paired with an eligible market maker guarantee order is presentedto the marketplace for possible matching opportunities;

FIGS. 8A-8B illustrate processes for adjusting the directed cross pricein view of a trade through situation;

FIGS. 9A-9B illustrate processes for generating matched sell and matchedbuy instructions; and

FIGS. 10A-10B illustrate processes for presenting a directed buy anddirected sell order to the internal book.

DETAILED DESCRIPTION

Referring to FIG. 1A, a trading environment in which an embodiment ofthe system and method of the present disclosure operates is depicted.The examples discussed herein describe the use and application of thepresent disclosure in an equity security market center environment, butit should be understood that the present disclosure could be used in anytype of financial instrument market center environment (e.g., equities,futures, options, bonds, etc.). The trading environment of thisembodiment includes a posting market center 20 which interacts with anumber of other market centers 24 (i.e. away markets) and traders atorder sending firms 26 and market makers 31. The disclosure describedherein is applicable to issues with participating market makers 31;however, it should be understood that market makers 31 may provideliquidity to the posting market center 20 by way of special order types(e.g., “Q Orders”) rather than (or in addition to) just using publishedquotes. It should also be understood that the posting market center 20referred to herein refers to a computing system having sufficientprocessing and memory capabilities and does not refer to a specificphysical location. In fact, in certain embodiments, the computing systemmay be distributed over several physical locations. It should also beunderstood that any number of order sending firms 26 or market makers 31or away market centers 24 can interact with the posting market center20. As described herein, the posting market center 20 is the marketcenter on which a specific order sending firm 26 posts a specific order,and on which a specific market maker 31 posts a specific Q Order orquote. In this embodiment, the posting market center 20 includes anorder matching engine 21, which validates, matches and processes allorders and quotes on the posting market center 20. In this embodiment,the code for the order matching engine 21 is stored in the postingmarket center's memory.

The posting market center 20 may also include a quote and last saleinterface 23 that interacts with the away market centers 24 to capturequote and last sale information. This information is stored to a bestbids and offers and last sales data structure 25. This data structure 25is where the market best bid and offer information is stored. This datastructure 25 is also where the market trade reports (prints) are stored.The posting market center 20 may also include an order and tradeparameters data structure 27. The order and trade parameters datastructure 27 stores pre-defined trading parameters and rules that areused by the order matching engine 21 in matching orders and executingtrades. The posting market center 20 may also include an order andexecution interface 28 which interacts with the traders at order sendingfirms 26, the market makers 31, the away market centers 24 and the ordermatching engine 21 in the order designation and execution process. Theposting market center 20 may also include an order information datastructure 29 where order information is stored, and a trade informationdata structure 30 where completed trade information is stored. Theposting market center 20 may also include a market maker interface 32that interacts with market makers 31 to capture market maker bids,offers and guarantee order information, as explained below, in assignedissues. In this illustration, guarantee orders are logically depicted ina market maker guarantee order structure 36, whereas market makers bidsand offers consist of Q Orders that are logically depicted in the orderinformation data structure 29. In another embodiment, the market makerbids and offers may consist of quotes that are logically depicted in theaway market center best bids and offers data structure 25, or in aseparate data structure not shown in this illustration. Q Orders andquotes are ranked and executed like any other fully-displayedlimit-priced order type.

Throughout the discussion herein, it should be understood that thedetails regarding the operating environment, data structures, and othertechnological elements surrounding the posting market center 20 are byway of example and that the present disclosure may be implemented invarious differing forms. For example, the data structures referred toherein may be implemented using any appropriate structure, data storage,or retrieval methodology (e.g., local or remote data storage in databases, tables, internal arrays, etc.). Furthermore, a market center ofthe type described herein may support any type of suitable interface onany suitable computer system.

Referring now to FIG. 1B, a more detailed illustration of the portion ofthe posting market center 20 that is involved in the directed orderprocess of this disclosure is depicted. Specifically, as depicted, theorder matching engine 21 includes directed order routines and guaranteeorder maintenance routines. In this embodiment, the directed orderroutines include a routine to check permissions for incoming directedorders 40, a routine to determine if directed buy orders can trade 42 a,a routine to determine if directed sell orders can trade 42 b, a routineto adjust a directed cross order's price for national best bid (“NBB”)trade through 44 a, a routine to adjust a directed cross order's pricefor national best offer (“NBO”) trade through 44 b, a routine togenerate a matched sell instruction 46 a, a routine to generate amatched buy instruction 46 b, a routine to present a directed buy to theinternal book 48 a and a routine to present a directed sell to theinternal book 48 b. These routines when activated result in a directedorder with match instructions for a directed cross 50 and a guaranteeorder selected for the directed cross 51. In this embodiment, theguaranteed order maintenance routines include a routine to validateguarantee buy orders 52 a, a routine to validate guarantee sell orders52 b, a routine to update pegged guarantee buy orders based on a new NBB54 a and a routine to update pegged guarantee sell orders based on a newNBO 54 b.

The posting market center 20 illustrated in FIG. 1B further includes adesignated market maker and order sending firm (“DMM/OSF”) permissionstable 60 which, in this embodiment, is located in the order and tradeparameters data structure 27. The posting market center 20 also includesguarantee order book data tables 62 which, in this embodiment, arelocated on the market maker guarantee orders data structure 36.

As illustrated in FIG. 1B, in a preferred embodiment, when a marketmaking firm 31 is willing to accept directed orders from a specificorder sending firm 26, the market making firm 31 creates a book 62 ofvirtual, non-disclosed guarantee orders exclusively allocated for thatorder sending firm 26. Then, when an order sending firm 26 desires totrade with that specific market making firm 31, the order sending firm26 sends a directed order to the posting market center 20 indicatingthat preference. If the directed order is permissioned and is marketableagainst the best contra guarantee order, the orders are automaticallypaired on the posting market center 20, and the cross is evaluated forpossible interaction with superior orders and/or quotes. The validation,pairing, and execution of this mutual trading interest are, in thisembodiment, handled completely electronically by the directed orderprocess using the routines resident in the order matching engine 21.

When a directed order and a guarantee order are paired for execution,the two-sided order is referred to as a “directed cross” order herein.As will be described in detail, a directed cross order conforms to allprevailing marketplace regulations regarding the protection of displayedorders and quotes. Note that while this document uses the equitiesmarketplace as its model, this disclosure may also be applicable toother financial markets, including options and futures marketplaces.

As referred to herein, the routines that validate, maintain, price,execute, or reject the directed orders and the guarantee ordersconstitute the directed order process. All processing outside of thedirected order process is commonly referred to as the continuous ordermatching process. Non-directed orders execute solely in the continuousorder matching process, as do directed orders that have beenautomatically converted to non-directed orders because they are eithernot eligible to participate in the directed order process or elsebecause they have exhausted the trading opportunities available in thedirected order process and are eligible for additional matchingopportunities.

In a preferred embodiment, the directed order process acts as describedbelow. Before a regular trading session begins, designated market makers31 create a two-sided guarantee order book 62 for each of the ordersending firms 26 that are permissioned to send those market makers 31directed order flow. The posting market center 20 grants (or denies)permission to order sending firms 26 that prefer to send orders to aspecific designated market maker 31. Order sending firms 26 can onlysend directed orders to the specific designated market makers 31 thathave been permissioned by the posting market center 20 to receivedirected order flow from them. In a preferred embodiment, market makers31 can choose to send limit-priced guarantee orders, primary pegguarantee orders or any other type of guarantee order supported by theposting market center 20. Market makers 31 may also combine differentguarantee order types in the same guarantee order book. For example, amarket maker 31 may elect to send pegged orders whose prices will followthe NBBO and also send limit orders at prices away from the market incase “circuit breakers” are needed.

The trading relationship between each order sending firm 26 anddesignated market maker 31 is established via a routing permissionstable, referred to as the “DMM/OSF permissions table” 60 in thisdocument. The DMM/OSF permissions table 60 contains an entry for eachpermissioned DMM/OSF pair, for each issue in which they can tradepreferentially.

The DMM/OSF permissions table 60 allows orders to be directed on afirm-wide basis or on an order-by-order basis. For example, an ordersending firm 26 may elect to have all their directed ordersautomatically default to route to a particular designated market maker31. But if they wish to route specific directed orders to a differentdesignated market maker 31, they can override the default by explicitlysending the preferred designated market maker's identifier on thoseselected orders.

The posting market center's rules allow more than one designated marketmaker 31 to be registered in most issues, but not every issue will havea designated market maker 31. In cases where an issue does not have aregistered designated market maker 31, the directed order process willattempt to determine a default designated market maker 31 wherepossible.

The example that follows, along with FIGS. 1B and 2, illustrates therouting permissions for an instrument, Issue XYZ. In this example, theDMM/OSF permissions table 60 contains the following entries:

Designated Market Default Order Sending Issue Maker Firm (DMM) DMM? Firm(OSF) XYZ FirmA FirmC XYZ FirmA Y FirmD XYZ FirmB Y FirmB XYZ FirmBFirmD

Issue XYZ has two designated market makers 31, Firm A 31 a and Firm B 31b. Firm A 31 a is permissioned to receive directed orders from two ordersending firms 26: Firm C 26 a and Firm D 26 b. Firm B 26 c ispermissioned to received directed orders from two order sending firms:Firm B 26 c and Firm D 26 b. As illustrated in this example, a firm maybe permissioned to direct orders to itself, as is the case for Firm B.For example, the retail desk of Firm B 26 c may direct orders to themarket making desk of Firm B 31 b.

Every row in the DMM/OSF permissions table 60 represents a DMM/OSF pair.Each DMM/OSF pair has a corresponding two-sided book of guarantee orders62 that the designated market maker 31 allocates exclusively for tradingagainst the specified order sending firm 26, as depicted in FIG. 1B 62a-62 d. When an order sending firm 26 sends a directed order, the orderis automatically routed to the order book 62 having the guarantee ordersallocated for that order sending firm 26.

In this example, as Firm A has agreed to accept directed orders fromFirm C, Firm A must submit buy and sell orders to a guarantee order bookexclusively allocated for Firm C 62 a. As Firm A has also agreed toaccept directed orders from Firm D, Firm A must also submit buy and sellorders to a separate guarantee order book exclusively allocated for FirmD 62 b. The table shows that Firm B accepts directed orders from itselfand also from Firm D. Firm B must therefore submit buy and sell ordersto its guarantee order book for matching with Firm B 62 c, and it mustlikewise submit buy and sell orders to a separate guarantee order bookfor matching with Firm D 62 d.

By supporting a different guarantee order book for each DMM/OSF pair, inthis embodiment of the disclosure, designated market makers 31 areallowed to price and size their guarantee orders differently for eachorder sending firm 26, as depicted in FIG. 2. For example, a designatedmarket maker 31 could offer price improvement to one order sending firm26, but could choose to trade at or outside the NBBO with a differentorder sending firm 26.

As specified in the DMM/OSF permissions table 60, Firm A is the defaultdesignated market maker 31 for all directed orders from Firm D in symbolXYZ. If Firm D sends a directed order to the posting market center 20 inissue XYZ and does not specify a designated market maker 31 on theorder, then the directed order process routes the order to Firm A'sguarantee order book 62 b for Firm D by default. If Firm D wishes tosend a directed order in XYZ to Firm B instead, then Firm D mustexplicitly specify Firm B as the designated market maker on anorder-by-order basis.

Firm B is the default designated market maker for directed orders fromFirm B. If Firm B sends a directed order to the posting market center 20in issue XYZ and does not specify a designated market maker 31 on theorder, then the directed order process routes the order to Firm B'sguarantee order book 62 c for Firm B by default.

If Firm C sends a directed order to the posting market center 20 inissue XYZ and does not specify a designated market maker 31, then thedirected order process does not derive a default designated market makerbecause this information is not explicitly provided in the DMM/OSFpermissions table 60. The directed order process then passes theincoming directed order to the regular continuous order matchingprocess, where it is processed as if it were a regular non-directedorder.

Types of Orders Available in a Preferred Embodiment

In one embodiment, the posting market center 20 supports a variety oforder types as shown in the table below. It should be understood thatany variation or combination of these order types could be used in otherembodiments of the disclosure.

In one embodiment, order sending In one embodiment, designated firms maysend these directed market makers may send these order types todesignated market guarantee order types to the virtual makers with whomthey have a guarantee order books allocated for preferred relationship:permissioned order sending firms: Sweep Limit Limit Inside Limit PrimaryPeg Sweep Market Inside Market Exchange-Restricted Immediate or Cancel(“IOC”)

In another, more complex embodiment, designated market makers may sendprimary peg guarantee orders with one or more additional peggingattributes, as shown in the table below.

In another embodiment, order In another embodiment, designated sendingfirms may send these market makers may send these directed order typesto designated guarantee order types to the virtual market makers withwhom they guarantee order books allocated for have a preferredrelationship: permissioned order sending firms: Sweep Limit Limit InsideLimit Primary Peg Sweep Market with Reserve Inside Market with Peg LimitExchange-Restricted with Peg Offset IOC with Discretion Offset

Order sending firms 26 send directed orders to designated market makers31 with the hope, but not guarantee, of receiving a fill. An ordersending firm 26 must send a directed order whose price is marketableagainst a resting guarantee order for a directed cross to be possible.Even if an incoming directed order is marketable against a restingguarantee order, a directed cross execution is not ensured. It ispossible that the incoming directed order cannot interact with awaymarkets due to the matching rules inherent in its order type, andtherefore cannot participate in a directed cross because it would causea trade-through violation. It is also possible that after an incomingdirected order executes against superior trading interest in themarketplace, it may not have any Leaves quantity available to cross withthe guarantee order.

Regardless of the underlying order type used in the directed order, inthis embodiment, all directed orders must first satisfy superior tradinginterest before being allowed to cross with a paired guarantee order.The underlying order type determines whether the directed order canroute or not; the number of price levels at which the directed order canroute; and the disposition of any remaining quantity in the directedorder after it has, crossed with a paired guarantee order. The rules forprocessing each different directed order type in this embodiment aredescribed below.

Directed Sweep Limit Order

A directed sweep limit order can trade with any bid or offer in themarketplace. If a directed sweep limit order must interact with themarketplace, it will concurrently match, in price/time priority:

-   -   Passive liquidity orders whose nondisplayed prices are superior        to the NBBO and superior to the directed cross    -   Orders whose displayed prices are superior to the directed cross    -   Away market quotes whose prices are superior to the directed        cross    -   Orders whose displayed prices are equal to the directed cross    -   The paired guarantee order presented for the directed cross

If any shares of the incoming directed sweep limit order remain aftercrossing the guarantee order, the matching engine 21 subsequently treatsthe directed sweep limit order as if it were a regular, non-directedsweep limit order. Accordingly, if the unmatched shares are marketable,the matching engine 21 attempts to execute the remainder of the sweeplimit order against all book orders and away market quotes in price/timepriority, until the sweep limit order is either exhausted or becomesnonmarketable. If any unmatched shares are not marketable, the matchingengine 21 posts the remainder of the sweep limit order to the publicorder book.

Directed Sweep Market Order

A directed sweep market order, in a preferred embodiment, behavesexactly like a directed sweep limit order, except that the order is notcapped by a limit price and is never posted. Accordingly, a directedsweep market order executes until it is exhausted.

Directed Inside Limit Order

A directed inside limit order can only execute at the NBBO. As a result,an incoming directed inside limit order must be paired with a guaranteeorder whose price is at or better than the best away market quote forthe resulting directed cross price to be valid. If the guarantee order'sprice is worse than the best away market quote, then the resultingdirected cross price is not valid because it would trade through an awaymarket quote if executed. In such a case, the incoming directed insidelimit order cannot trade in the directed order process, and the entireorder is treated as a non-directed inside limit order in the regularcontinuous order matching process instead.

If the directed inside limit order cannot cross cleanly and mustinteract with the marketplace, it executes against the followingresident trading interest, in price/time priority:

-   -   Passive liquidity orders whose nondisplayed prices are superior        to the NBBO and superior to the directed cross    -   Orders whose displayed prices are superior to the directed cross    -   Orders whose displayed prices are equal to the directed cross    -   The paired guarantee order presented for the directed cross

If any shares of the incoming directed inside limit order remain aftercrossing the guarantee order, the matching engine 21 subsequentlyprocesses the directed inside limit order as if it were a regular,non-directed inside limit order. Accordingly, the non-directed insidelimit order is allowed to route to away markets only if they are at theNBBO. Once the non-directed inside limit order has routed to all awaymarkets at the NBBO, the remainder of the order is posted. If the orderwould cause the NBBO to become crossed, then the order is repriced atthe opposite side of the NBBO before it is posted.

Directed Inside Market Order

A directed inside market order behaves exactly like a directed insidelimit order, except that the order is not capped by a limit price and isnever posted. Accordingly, a directed inside market order executes untilit is exhausted. If any shares of the incoming directed inside marketorder remain after crossing the guarantee order, the matching engine 21subsequently processes the directed inside market order as if it were aregular, non-directed inside market order. The order must ‘walk thebook,’ clearing all book orders and away market quotes at the publishedNBBO price. The order cannot proceed to the next price level until allaway markets move their quotes, and a new NBBO is disseminated.

Directed Exchange-Restricted Order

A directed exchange-restricted order can only trade on the postingmarket center, as exchange-restricted orders are never routed bydefinition. As a result, an incoming directed exchange-restricted ordermust be paired with a guarantee order whose price is at or better thanthe best away market quote for the resulting directed cross price to bevalid unless the issue has a trade-through exemption as described below.

In the absence of such a trade-through exemption, if the guarantee orderprice is worse than the best away market quote, then the resultingdirected cross price is not valid because it would trade through an awaymarket quote if executed. In such a case, the incoming directedexchange-restricted order cannot trade in the directed order process,and the entire order is treated as a non-directed exchange-restrictedorder in the regular continuous order matching process instead.

If a directed exchange-restricted order cannot cross cleanly and mustinteract with the marketplace, it executes against the resident tradinginterest, in the same price/time priority as described above fordirected inside limit orders. If any shares of the incoming directedexchange-restricted order remain unexecuted after crossing the guaranteeorder, the matching engine 21 subsequently processes the remainder ofthe directed exchange-restricted order as if it were a regular,non-directed exchange-restricted order. Accordingly, if the unmatchedshares are marketable, the matching engine 21 executes theexchange-restricted order with any overlapping book orders. If theunmatched shares are not marketable, the matching engine 21 posts theremainder of the exchange-restricted order to the public order book. Ifthe unmatched shares would lock or cross the NBBO if posted to thepublic order book, then the matching engine 21 cancels the remainder ofthe exchange-restricted order.

Directed IOC Order

A directed IOC order executes just like a directed exchange-restrictedorder, except that any unmarketable portion of the order cannot beposted and must be canceled immediately instead. Like a directedexchange-restricted order, a directed IOC order can only trade on theposting market center and is never routed by definition. If any sharesof the incoming directed IOC order remain unexecuted after crossing theguarantee order, the matching engine 21 subsequently processes theremainder of the directed IOC order as if it were a regular,non-directed IOC order. Accordingly, if the unmatched shares aremarketable, the matching engine 21 executes the IOC order with anyoverlapping book orders. If the unmatched shares are not marketable, thematching engine 21 cancels the remainder of the IOC order.

Trade-Through Exemption for Directed Exchange-Restricted Orders andDirected IOC Orders

For certain issues, a marketwide de minimis exemption may allow incomingorders to trade through the best away market by a specified amount(e.g., three cents) to execute against book orders. If such an exemptionexists for non-directed exchange-restricted orders and non-directed IOCorders, then it also applies to directed exchange-restricted orders anddirected IOC orders. Such incoming directed orders are allowed to matchorders priced off the NBBO, including guarantee orders.

As a result, an incoming directed IOC order or an incoming directedexchange-restricted order must be paired with a guarantee order whoseprice is not worse than the specified price increment (e.g., threecents) off the best away market quote for the resulting directed crossprice to be valid. For example, assume the NBBO is $19.90 to $20.00 andthe offer side of the marketplace looks like this:

Offers Away Market A: Offer 200 @ 20.00 Order B: Sell 300 @ 20.03 OrderC: Sell 400 @ 20.04

An incoming exchange-restricted order to buy at $20.04 could bypass awaymarket A to execute against Order B (NBO+0.03), but could not executeagainst Order C (NBO+0.04). This is true whether the incoming order isdirected or non-directed. Similarly, an incoming directed ornon-directed IOC order to buy at $20.04 could bypass away market A toexecute against Order B, but not against Order C.

As both order types are allowed to execute against orders priced up tothree cents off the NBO, they are also allowed to execute againstguarantee orders priced up to three cents off the NBO. Thus, in thisexample, an incoming directed exchange-restricted order (or an incomingdirected IOC order) could execute against a guarantee sell order pricedlower than $20.00; at $20.00; at $20.01; at $20.02, or at $20.03, butnot at $20.04.

Designated Market Maker Guarantee Order Types Limit Guarantee Orders

Designated market makers 31 may submit limit-priced guarantee orders. Ifa limit guarantee order is submitted at a price that would lock or crossa guarantee order book 62, the order is rejected.

Primary Pee Guarantee Orders

In a preferred embodiment, designated market makers 31 may submitprimary peg guarantee orders, which are priced in relation to the sameside of the NBBO. A primary peg buy order follows the NBB, and a primarypeg sell order follows the NBO. The price of the order is automaticallyadjusted as the NBBO changes. If the NBBO becomes crossed, primary pegguarantee orders are not repriced to follow the cross in a preferredembodiment of the disclosure. For example, if the NBBO is $20.00 to$20.02, a primary peg buy order would be priced at $20.00, while aprimary peg sell order would be priced at $20.02. If the NBBO changed to$20.01 to $20.02, the primary peg buy order would automatically repriceto $20.01. On the other hand, if the NBBO changed to $20.02 to $20.01,neither order would be repriced.

In addition to the basic primary peg guarantee order described above,the posting market center 20, in a preferred embodiment, may also allowprimary peg orders to include other pegging attributes, e.g., primarypeg order+reserve+peg limit+peg offset or discretion offset. As a pegoffset makes a primary peg guarantee order's current price lessaggressive while a discretion offset makes a primary peg guaranteeorder's current price more aggressive, the two offsets cannot beincluded on the same order. This restriction does not apply to regular(non-guarantee) primary peg orders, which allow both offsets becauseonly the peg offset affects the current, displayed order price (whilethe discretion offset determines the more aggressive, nondisplayedprice). As guarantee orders do not have a displayed price, both offsetsaffect the current price.

Primary Peg Guarantee Order with Reserve

A primary peg guarantee order may have reserve size. Rules forprocessing reserve size differs for guarantee orders and regular(non-guarantee) orders. On a regular, non-guarantee order, the show sizecaps the maximum size to display publicly to the marketplace, while thereserve size hides the remainder of the order from the marketplace.Although the reserve size is not displayed, it is nevertheless availablefor immediate matching if all displayed orders at the same price havebeen exhausted.

In contrast, a guarantee order is completely hidden from the marketplaceand therefore does not need to hide a portion of its total order size.Instead, the show size caps the maximum size available to trade with anygiven incoming directed order, while the reserve size allows the showsize to be replenished whenever it is depleted. In contrast to a regularnon-guarantee order, the reserve size of a guarantee order is notavailable for immediate matching with an incoming order whose sizeexceeds the show size.

For example, assume a market maker 31 submits a primary peg guaranteebuy order for 5000 shares, with a show size of 500 shares and a reservesize of 4500 shares. The guarantee order will match an incoming directedorder up to a maximum size of 500 shares. If an order sending firm 26sends a directed order to sell 700 shares to the designated market maker31, the directed order process pairs 500 shares (not 700 shares) of theguarantee buy order with the directed sell order. After the ordersexecute, it replenishes the show size of the guarantee buy order back to500 shares, reducing its reserve size to 4000 shares.

Primary Peg Guarantee Order with Peg Limit

A peg limit allows a market maker 31 to specify the maximum price(ceiling) to which a primary peg buy order will follow the NBB, or theminimum price (floor) to which a primary peg sell order will follow theNBO. If the market moves outside the specified ceiling or floor, theorder ceases to be pegged and behaves exactly as a limit order instead.If the market moves within the ceiling or floor again, then peggingresumes.

For example, a primary peg sell order has a peg limit price of $20.01.The NBBO is $20.00 to $20.02 when the order is submitted. The order isautomatically priced at $20.02, the NBO. When the NBO changes to $20.03,the order is automatically repriced at $20.03. When the NBO changes to$20.01, the order is automatically repriced at $20.01. But when the NBOchanges to $20.00, the order remains at $20.01 and is not repriced at$20.00 because the NBO ($20.00) is now lower than the minimum price thatthe user has specified in the peg limit (i.e. $20.01). If the NBOchanges to $20.01 or higher, though, the order resumes pegging.

Primary Peg Guarantee Order with Peg Offset

A peg offset allows a market maker 31 to specify a fixed price intervalaway from the NBBO. A peg offset must always be negative for a buy order(e.g., buy at bid−0.01) and must always be positive for a sell order(e.g., sell at offer+0.01). These rules ensure that the guarantee ordersare always priced less aggressively than the NBBO.

Primary Peg Guarantee Order with Discretion Offset

A discretion offset also allows a market maker 31 to specify a fixedprice interval away from the NBBO—but in the opposite direction as a pegoffset. A discretion offset must always be positive for a buy order(e.g., buy at bid+0.01) and must always be negative for a sell order(e.g., sell at offer−0.01). These rules ensure that the orders arealways priced more aggressively than the NBBO. This allows market makersto provide price improvement to incoming directed orders. As previouslydescribed, if the business rules of the posting market center 20 do notallow guarantee orders to execute at prices that are superior to theNBBO, then discretionary offsets are not allowed in such an embodimentof the disclosure, and guarantee orders having discretionary offsetswould be rejected back to the market maker 31.

In the regular continuous order matching process, orders with discretionare not allowed to provide price improvement by stepping ahead of othermarketable orders to intercept an incoming order. Instead, they are onlyallowed to use discretion to intercept an incoming order that wouldotherwise be canceled, posted, or routed, and they are only allowed touse the minimum amount of discretion necessary to do so. In contrast, inthe directed order process, if a market maker 31 wishes to alwaysprovide price improvement to a permissioned order sending firm 26, aprimary peg guarantee order with discretion provides for this behavior.A primary peg guarantee order with discretion is always priced betterthan the NBBO by the specified number of ticks. This ensures that anincoming directed order will cross cleanly with the resting primary pegguarantee order unless a superior passive liquidity order resides on theposting market center 20 and must execute first. As passive liquidityorders are never displayed to the marketplace, they may be superior tothe NBBO and therefore also superior to a primary peg guarantee orderwith discretion.

To illustrate the difference between regular (non-guarantee) primary pegorders with discretion and primary peg guarantee orders with discretion,two examples are provided below.

EXAMPLE 1 Regular (Non-Guarantee) Primary Peg Order with Discretion

This example illustrates how a regular (non-guarantee) primary peg orderis not able to grant price improvement to an incoming order becauseprimary peg orders can improve the NBBO only if an incoming order is notmarketable against the NBBO. In this example, the NBBO is $20.00 to$20.03. The offer side of the internal book looks like this:

Offers Order A: Sell 200 @ 20.03 Order B: Sell 200 @ 20.03, Peg to NBO,Discretion Offset = −.01 Away Market A: Offer 400 @ 20.03Order B is a primary peg sell order with discretion. It is currentlypriced at $20.03, with discretion to $20.02.

If the order matching engine 21 receives an incoming order to buy 300 at$20.03, it executes 200 shares against Order A at $20.03 and thenexecutes 100 shares against Order B at $20.03. As the incoming buy orderis marketable against Order A's displayed price, it does not allow OrderB to step ahead of it and trade at its discretionary price.

EXAMPLE 2 Primary Peg Guarantee Order with Discretion

This example illustrates how a primary peg guarantee order is able togrant price improvement to an incoming directed order because theguarantee order is priced at its discretionary price, which is superiorto the NBBO. Unlike regular (non-guarantee) primary peg orders, primarypeg guarantee orders improve the NBBO even if an incoming order ismarketable against the NBBO.

In this example, the NBBO is $20,00 to $20.03. The offer side of theinternal book looks like this:

Offers Order A: Sell 200 @ 20.03 Away Market A: Offer 400 @ 20.03

The virtual guarantee order book contains the following order:

Guarantee Sell Orders Order C: Sell 200 @ 20.02, Peg to NBO, DiscretionOffset = − .01

Guarantee Order C is a primary peg sell order with discretion. It iscurrently priced at $20.02, not $20.03 with discretion to $20.02. Thisis different from the pricing of non-Guarantee Order B in the previousexample.

The directed order process receives an incoming directed order to buy300 at $20.03. It pairs 200 shares of the incoming directed buy orderwith Guarantee Order C at the guarantee order price, $20.02.

As the resulting directed cross price of $20.02 is superior to alloffers in the marketplace, the directed order process crosses theincoming directed buy order cleanly against Guarantee Order C, executing200 shares at $20.02. The remaining 100 shares of the incoming directedorder are released to the normal continuous order matching process,where it executes 100 shares against Order A at $20.03.

As shown in this example, a primary peg guarantee order is able to offerprice improvement by using a discretion offset to ensure that its priceis always superior to the NBBO when the market is unlocked anduncrossed.

Receiving an Incoming Guarantee Order from a Market Maker

Before a trading session begins, a designated market maker 31 mustpopulate its guarantee order books 62 for each order sending firm 26 ithas a relationship with, as depicted in FIG. 2. FIG. 3A illustrates aprocess implemented by activating the guarantee buy order validationroutine 52 a in the order matching engine 21 when a designated marketmaker 31 sends a buy order to the posting market center 20 withinstructions that the buy order be allocated for a specific ordersending firm 26 and maintained in a virtual guarantee order book 62 forthat purpose. FIG. 3B illustrates a similar process implemented byactivating the guarantee sell order validation routine 52 b in the ordermatching engine 21 for a received sell order.

Referring to FIG. 3A, at step 100, a new guarantee buy order is receivedby the order matching engine 21, and the order matching engine 21,recognizing the incoming order processing request, initiates theguarantee buy order validation routine 52 a. At step 102, the activatedprocess retrieves the DMM/OSF permissions table data. At step 104, theprocess checks to determine if this market maker sending the buy orderis permissioned to allocate guarantee orders for the indicated ordersending firm. If the process determines that this market maker is notpermissioned to allocate guarantee orders for the indicated ordersending firm, then the process proceeds to step 122, where it rejectsthe incoming guarantee buy order, and the process is terminated at step124 as indicated.

If, however, the market maker sending the buy order is permissioned toallocate guarantee orders on behalf of the indicated order sending firm,then the process continues to step 106, where it retrieves the data forthe virtual guarantee order book allocated for this order sending firm.At step 108, the process checks if there are any guarantee sell ordersresiding in the guarantee order book. If there are, then the processretrieves the best (lowest priced) guarantee sell order at step 110. Atstep 112, the process then compares the price of the incoming guaranteebuy order to the price of the retrieved guarantee sell order. If theincoming guarantee buy order is a primary peg order, then its price mustbe determined before it can be compared to other orders. The processinvokes the New NBB Updates Pegged Guarantee Buy Orders routine 54 a anduses the process illustrated in FIG. 4A and described below to determinethe price of the incoming primary peg buy order.

If, at step 112, it is determined that the price of the incomingguarantee buy order is greater than or equal to the price of theretrieved guarantee sell order, the incoming guarantee buy order isrejected, as indicated at step 122, because to accept this buy orderwould result in a locked or crossed guarantee order book. The incomingorder is canceled to protect the market maker from this situation. Theprocess then terminates as indicated at step 124.

If, however, at step 112, it is determined that the incoming guaranteebuy order is less than the retrieved guarantee sell order, then theprocess continues to step 114. Referring again to step 108, the processalso proceeds to step 114 if there are no guarantee sell orders in theguarantee order book.

At step 114, the process checks whether the price of the incomingguarantee buy order is the same as any guarantee buy order that alreadyresides in the virtual guarantee order book 62. If a resting guaranteebuy order has the same price as the incoming guarantee buy order, thenthe process proceeds to step 120, where it checks if the business rulesof the posting market center allow multiple guarantee buy orders at thesame price. If multiple guarantee buy orders at the same price are notallowed, then the process rejects the incoming guarantee buy order, asindicated at 122, and the process terminates as indicated at 124. If, onthe other hand, at step 120, the posting market center's business rulesallow multiple guarantee buy orders at the same price, then the processproceeds to step 116, where it inserts the incoming guarantee buy orderin the guarantee order book 62 in price/time priority. Similarly, if, atstep 114, the process determines that the price of the incomingguarantee buy order is unique, then the process also in that situationinserts the incoming guarantee buy order in the guarantee order book 62in price/time priority, as indicated at step 116. After insertion of theorder in the guarantee order book 62, the process terminates asindicated at 118.

Referring to FIG. 3B, the process implemented by activating theguarantee sell order validation routine 52 b in the order matchingengine 21 for a received sell order, which is very similar to theprocess described above for a received buy order, is illustrated. Atstep 200, a new guarantee sell order is received by the order matchingengine 21, and the order matching engine 21, recognizing the incomingorder processing request, initiates the guarantee sell order validationroutine 52 b. At step 202, the activated process retrieves the DMM/OSFpermissions table data. At step 204, the process checks to determine ifthis market maker sending the sell order is permissioned to allocateguarantee orders for the indicated order sending firm. If the processdetermines that this market maker is not permissioned to allocateguarantee orders for the indicated order sending firm, then the processproceeds to step 222, where it rejects the incoming guarantee sellorder, and the process is terminated at step 224 as indicated.

If, however, the market maker sending the sell order is permissioned toallocate guarantee orders on behalf of the indicated order sending firm,then the process continues to step 206, where it retrieves the data forthe virtual guarantee order book allocated for this order sending firm.At step 208, the process checks if there are any guarantee buy ordersresiding in the guarantee order book. If there are, then the processretrieves the best (highest priced) guarantee buy order at step 210. Atstep 212, the process then compares the price of the incoming guaranteesell order to the price of the retrieved guarantee buy order. If theincoming guarantee sell order is a primary peg order, then its pricemust be determined before it can be compared to other orders. Theprocess invokes the New NBO Updates Pegged Guarantee Sell Orders routine54b and uses the process illustrated in FIG. 4B and described below todetermine the price of the incoming primary peg sell order.

If, at step 212, it is determined that the price of the incomingguarantee sell order is less than or equal to the price of the retrievedguarantee buy order, the incoming guarantee sell order is rejected, asindicated at step 222, because to accept this sell order would result ina locked or crossed guarantee order book. The incoming order is canceledto protect the market maker from this situation. The process thenterminates as indicated at step 224.

If, however, at step 212, it is determined that the incoming guaranteesell order is greater than the retrieved guarantee buy order, then theprocess continues to step 214. Referring again to step 208, the processalso proceeds to step 214 if there are no guarantee buy orders in theguarantee order book.

At step 214, the process checks whether the price of the incomingguarantee sell order is the same as any guarantee sell order thatalready resides in the virtual guarantee order book 62. If a restingguarantee sell order has the same price as the incoming guarantee sellorder, then the process proceeds to step 220, where it checks if thebusiness rules of the posting market center allow multiple guaranteesell orders at the same price. If multiple guarantee sell orders at thesame price are not allowed, then the process rejects the incomingguarantee sell order, as indicated at 222, and the process terminates asindicated at 224. If, on the other hand, at step 220, the posting marketcenter's business rules allow multiple guarantee sell orders at the sameprice, then the process proceeds to step 216, where it inserts theincoming guarantee sell order in the guarantee order book 62 inprice/time priority. Similarly, if, at step 214, the process determinesthat the price of the incoming guarantee sell order is unique, then theprocess also in that situation inserts the incoming guarantee sell orderin the guarantee order book 62 in price/time priority, as indicated atstep 216. After insertion of the order in the guarantee order book 62,the process terminates as indicated at 218.

Guarantee Order Price Updates

In one embodiment, if pegged guarantee orders are supported and adesignated market maker has inserted pegged guarantee orders into itsguarantee order books 62, the price of the pegged orders must be updatedin relation to the NBBO. Depending on processing requirements andefficiencies, the update process may be configured to continually updatepegged guarantee orders whenever the NBBO for the instrument changes orthe process may be configured to update the price of a pegged guaranteeorder only when the order is retrieved by the directed order process andpaired with an incoming directed order in preparation for a directedcross.

When the NBBO for an issue becomes crossed, the directed order processdoes not update the prices of the pegged guarantee orders because bydoing so it could cause a market maker's guarantee order book to alsobecome crossed. Instead, the pegged guarantee orders will remain attheir current prices until the next uncrossed NBBO is disseminated.

In a preferred embodiment of the disclosure, when the NBBO for an issuebecomes locked, the directed order process updates the prices of thepegged guarantee orders, even if by doing so it would cause a marketmaker's guarantee order book to also become locked. However, in anotherembodiment, the directed order process waits for the nextunlocked/uncrossed NBBO before updating the prices of any peggedguarantee orders.

Referring to FIGS. 4A and 4B, processes are illustrated for updating apegged guarantee order in view of a changing NBBO. FIG. 4A illustrates aprocess implemented when the “New NBB Updates Pegged Guarantee BuyOrders” routine 54 a in the order matching engine 21 is activated. FIG.4B illustrates a similar process implemented when the “New NBO UpdatesPegged Guarantee Sell Orders” routine 54 b in the order matching engine21 is activated.

When the “New NBB Updates Pegged Guarantee Buy Orders” routine 54 a isactive, the process updates the price of a resting primary peggedguarantee buy order when the process detects a new NBB price. Thisprocess may be globally invoked for all primary peg buy orders in allguarantee order books 62 whenever the NBB changes, or it may beselectively invoked only as necessary, i.e., when an incoming directedsell order is about to be paired with a resting primary peg guaranteebuy order. In the latter case, only the guarantee order book 62allocated for the order sending firm 26 that sent the directed order isretrieved and evaluated. The above is also true for primary peggedguarantee sell orders when the “New NBO Updates Pegged Guarantee SellOrders” routine 54 b is active.

Referring to FIG. 4A, at step 130, the “New NBB Updates Pegged GuaranteeBuy Orders” routine 54 a is activated. At step 132, the processretrieves the NBBO. At step 134, the process checks if the NBBO iscrossed. As, in this embodiment, pegged orders are not updated when theNBBO is crossed, the process terminates, as indicated at step 140, ifthe NBBO is crossed. If, however, at step 134, it is determined that theNBBO is not crossed, then the process continues to step 136, where itretrieves the guarantee order book under review. At step 138 then, theprocess determines whether the retrieved book includes any primary pegguarantee buy orders. If none exist, the process terminates, asindicated at 140,

If, on the other hand, the process at step 138 determines that theretrieved book does have primary peg guarantee buy orders, then theprocess retrieves the first resting primary peg guarantee buy order, asindicated at step 142. At step 144, then, the process sets the baselineprice of the retrieved order to the NBB, as primary peg buy orders arepegged to the NBB but may be optionally adjusted by an offset and/orcapped by a limit price. Accordingly, the CurrentOrderPrice parameter isinitially set to the NBB.

At step 146, the process checks if the retrieved order includes adiscretionary offset. If the order does not include a discretionaryoffset, then the process continues on to determine if the retrievedorder includes a peg offset at step 150. If, however, at step 146, theretrieved order does include a discretionary offset, then the process,at step 148, adds the discretionary offset to the CurrentOrderPriceparameter to yield an updated (more aggressive) CurrentOrderPriceparameter. The process then continues to step 150 to determine if theretrieved order includes a peg offset. It should be noted that a primarypeg guarantee order may include a discretionary offset or a peg offset,but not both, as these attributes have the opposite effect. If the orderdoes not include a peg offset, then the process continues to step 154.If, however, the order does include a peg offset, then the process, atstep 152, subtracts the peg offset from the CurrentOrderPrice parameterto yield an updated (less aggressive) CurrentOrderPrice parameter. Theprocess then proceeds to step 154.

At step 154, the process determines whether the retrieved order includesa peg limit. If the order does not include a peg limit, the processcontinues to step 160. If, however, the order does include a peg limit,then at step 156, the process checks if the CurrentOrderPrice parameteris higher than the peg limit, which caps the price of the order. If theCurrentOrderPrice parameter is higher, then the CurrentOrderPriceparameter is reset to the lower peg limit price at step 158, and theprocess continues to step 160. If, however, it is determined that theCurrentOrderPrice parameter is not higher than the peg limit at step156, then the order remains at its CurrentOrderPrice parameter, and theprocess continues to step 160.

At step 160, the process re-inserts the primary peg guarantee buy orderin the guarantee order book 62 according to its updatedCurrentOrderPrice parameter in price/time priority. At step 162, theprocess checks if there are any other resting primary peg guarantee buyorders in the guarantee order book 62 that need to be evaluated. If not,then the process terminates, as indicated at 166. If additional primarypeg guarantee buy orders do exist, however, then the process continuesto step 164, where it retrieves the next resting primary peg guaranteebuy order and returns to step 144, where it repeats the pricing processdescribed above.

Referring to FIG. 4B, in a process similar to the updating of a peggedguarantee buy order in view of a new NBB as described above, at step230, the “New NBO Updates Pegged Guarantee Sell Orders” routine isactivated. At step 232, the process retrieves the NBBO. At step 234, theprocess checks if the NBBO is crossed. As in this embodiment, peggedorders are not updated when the NBBO is crossed, the process terminates,as indicated at step 240 if the NBBO is crossed. If, however, at step234, it is determined that the NBBO is not crossed, then the processcontinues to step 236, where it retrieves the guarantee order book underreview. At step 238 then, the process determines whether the retrievedbook includes any primary peg guarantee sell orders. If none exist, theprocess terminates, as indicated at 240.

If, on the other hand, the process at step 238 determines that theretrieved book does have primary peg guarantee sell orders, then theprocess retrieves the first resting primary peg guarantee sell order, asindicated at step 242. At step 244, then, the process sets the baselineprice of the retrieved order to the NBO, as primary peg sell orders arepegged to the NBO but may be optionally adjusted by an offset and/orcapped by a limit price. Accordingly, the CurrentOrderPrice parameter isinitially set to the NBO.

At step 246, the process checks if the retrieved order includes adiscretionary offset. If the order does not include a discretionaryoffset, then the process continues on to determine if the retrievedorder includes a peg offset at step 250. If, however, at step 246, theretrieved order does include a discretionary offset, then the process,at step 248, subtracts the discretionary offset from theCurrentOrderPrice parameter to yield an updated (more aggressive)CurrentOrderPrice parameter. The process then continues to step 250 todetermine if the retrieved order includes a peg offset. If the orderdoes not include a peg offset, then the process continues to step 254.If however, the order does include a peg offset, then the process, atstep 252, adds the peg offset from the CurrentOrderPrice parameter toyield an updated (less aggressive) CurrentOrderPrice parameter. Theprocess then proceeds to step 254.

At step 254, the process determines whether the retrieved order includesa peg limit. If the order does not include a peg limit, the processcontinues to step 260. If, however, the order does include a peg limit,then at step 256, the process checks if the CurrentOrderPrice parameteris lower than the peg limit, which caps the price of the order. If theCurrentOrderPrice parameter is lower, then the CurrentOrderPriceparameter is reset to the higher peg limit price at step 258, and theprocess continues to step 260. If, however, it is determined that theCurrentOrderPrice parameter is not lower than the peg limit at step 256,then the order remains at its CurrentOrderPrice parameter, and theprocess continues to step 260.

At step 260, the process re-inserts the primary peg guarantee sell orderin the guarantee order book 62 according to its updatedCurrentOrderPrice parameter in price/time priority. At step 262, theprocess checks if there are any other resting primary peg guarantee sellorders in the guarantee order book 62 that need to be evaluated. If not,then the process terminates, as indicated at 266. If additional primarypeg guarantee sell orders do exist, however, then the process continuesto step 264, where it retrieves the next resting primary peg guaranteesell order and returns to step 244, where it repeats the pricing processdescribed above.

Receiving an Incoming Directed Order

With the guarantee order books 62 set by the market makers 31, directedorders can be sent to the posting market center 20 by order sendingfirms 26. Referring to FIG. 5, when the posting market center 20receives a directed order, the directed order routines (FIG. 1B) areactivated as required to conduct the directed order process. At step300, the “Check Permissions for Incoming Directed Order” routine 40 isactivated in order to determine if the sender and receiver arepermissioned to preferentially trade with each other. At step 302, theprocess sets the parameter designated as “OSF” to the order sending firmID included in the incoming directed order. Then, at step 304, theprocess retrieves the DMM/OSF permissions table 60. At step 306, theprocess checks if the incoming directed order includes the ID of adesignated market maker, i.e., a specific market maker firm that is theintended recipient of this directed order. If a designated market makeris not specified, then the process continues to step 316, where itconsults the DMM/OSF permissions table 60 to see if a default designatedmarket maker has been established for this order sending firm. If nodefault market maker has been established in the DMM/OSF permissionstable 60, then the process continues to step 312, where the incomingdirected order is automatically converted to a non-directed order and isprocessed according to the rules of the regular continuous ordermatching process. The instruction to treat this order as a directedorder is disregarded, and the process terminates as indicated at step314.

Referring again to step 306, if the directed order includes the ID of adesignated market maker, then the process, at step 308, assigns thedesignated market maker ID to the parameter “DMM.” At step 310, theprocess consults the DMM/OSF permissions table 60 to determine if a ruleexists for this DMM/OSF pair. If a rule does not exist, then this ordersending firm 26 is not permissioned to send directed orders to thisdesignated market maker. In this case, the process once again continuesto step 312, where the incoming directed order is automaticallyconverted to a non-directed order and is processed according to therules of the regular continuous order matching process. The instructionto direct this order to the designated market maker is disregarded, andthe process terminates as indicated at 314.

Referring again to step 310, however, if a rule does exist for theDMM/OSF pair, then this order sending firm 26 is permissioned to senddirected orders to the designated market maker 31. That being the case,the process continues to step 320, where it checks if the incomingdirected order is a buy or a sell order.

Referring again to step 316, if the process determines that a defaultdesignated market maker exists for the order sending firm sending theorder, then the process, at step 318 sets the parameter designated as“DMM” to the default market maker ID and continues to step 320.

At step 320, the process determines whether the incoming directed orderis a buy or a sell order. If the directed order is a buy order, then theprocess proceeds to step 322, where it invokes the “Determine ifDirected Buy Order Can Trade” routine 42 a (FIG. 6A). If, on the otherhand, the directed order is a sell order, then the process proceeds tostep 326, where it invokes the “Determine if Directed Sell Order CanTrade” routine 42 b (FIG. 6B).

Determine if Directed Order Can Trade

At this point in the process, a valid DMM/OSF pair has been identified.The process, as a result, proceeds to retrieve the guarantee order book62 that this designated market maker created for the paired ordersending firm. A directed buy order is marketable if its price overlapswith the best-priced guarantee sell order in the guarantee order book.Similarly, a directed sell order is marketable if its price overlapswith the best-priced guarantee buy order in the guarantee order book. Ifthe directed order price and the retrieved guarantee order priceoverlap, then the directed order process assigns the price of theretrieved guarantee order as the price for the directed cross to executeat.

Also, even though the process has now determined that the receiveddirected order is valid in regard to permissions, it must also determinethat the order pair is valid in regard to price. FIGS. 6A and 6Billustrate processes implemented in an embodiment of the disclosure todetermine if an incoming directed order is marketable against a restingcontra-side guarantee order and to evaluate whether crossing the orderswould cause a trade-through violation. FIG. 7 depicts an example of thepairing and matching of a directed buy order and a guarantee sell orderwherein the directed cross necessitated market interaction. As a crossis a two-sided instruction, both sides of the marketplace must beevaluated for possible trade-through violations. The process alsodetermines if the price of the pending cross must be adjusted to conformto the business rules of the posting market center 20.

Referring to FIG. 6A, the process is illustrated for an incomingdirected buy order. At step 350, the “Determine if Directed Buy OrderCan Trade” routine 42 a is activated, and at step 352, the processretrieves the virtual guarantee order book 62 that the designated marketmaker 31 created, with order allocations, for the order sending firm 26directing the order. Then, at step 354, the process retrieves the best(lowest priced) resting guarantee sell order from the guarantee orderbook 62. At step 356, the process then retrieves the NBBO and proceedsto step 358. At step 358, the process determines whether the restingguarantee sell order's price is superior to the NBO. If the price is notsuperior, then the process sets the pending directed cross price(“DirectedCrossPrice” parameter) equal to the price of the restingguarantee sell order at step 364.

Referring again to step 358, if, however, the price of the restingguarantee sell order is superior to (lower than) the NBO, then theprocess continues to step 360, where, in this embodiment, it checks ifthe business rules of the posting market center 20 allow the guaranteesell order to be executed at its superior price. If the rules allow theorder to execute at the superior price, then the process continues tostep 364, where the process sets the DirectedCrossPrice parameter equalto the price of the resting guarantee sell order. Referring again tostep 360, if, on the other hand, the rules of the posting market center20 do not allow the order to execute at the superior price, then theprocess continues to step 362, where it caps the DirectedCrossPriceparameter by setting it equal to the current NBO.

From steps 362 and 364, the process then proceeds to step 366, where theprocess compares the price of the incoming directed buy order to thederived DirectedCrossPrice parameter. If the process determines that theprice of the incoming directed buy order is lower, then the directed buyorder is not marketable against the resting guarantee sell order. Thatbeing the case, the process proceeds to step 386, where the incomingdirected buy order is automatically converted to a non-directed buyorder and is processed according to the rules of the regular continuousorder matching process. The instruction to direct this order to thedesignated market maker, therefore, is disregarded, and the processterminates as indicated at 388.

Referring back to step 366, if the process instead determines that theprice of the incoming directed buy order is greater than or equal to thederived DirectedCrossPrice parameter, then the incoming directed buyorder is marketable against the resting guarantee sell order. Theprocess, as a result, continues to step 368, where it checks if thederived DirectedCrossPrice parameter is greater than the NBB. The reasonfor this check in this embodiment is because the guarantee sell order isbeing allowed, in some situations, to execute at a superior price andthat price may be so aggressive that it is actually lower than or equalto the NBB. If the price of the guarantee sell order is lower than orequal to the NBB, then it could cause a trade-through of the NBB ifexecuted. At step 368, if the derived DirectedCrossPrice parameter ishigher than the NBB, then the pending directed cross can execute withouttrading through the NBB, so the process continues to step 374. If, onthe other hand, the derived DirectedCrossPrice parameter is not higherthan the NBB, then the cross price may need to be adjusted to preventtrading through the NBB, and the process continues to step 370, where itdetermines whether the price of the pending directed cross should beadjusted.

If, at step 370, the process determines that according to the businessrules of the posting market center 20, the directed cross price can beadjusted, then the “Adjust Directed Cross Price for NBB Trade Through”routine 44a is invoked as indicated at step 372 (FIG. 8A). If, however,at step 370, the process determines that the business rules of theposting market center 20 do not allow the price of the directed cross tobe adjusted, then the directed cross processing stops because thepending directed cross would trade through the NBB if allowed toexecute. As such, the process proceeds to step 386, where the incomingdirected buy order is automatically converted to a non-directed buyorder and is processed according to the rules of the regular continuousorder matching process. The instruction to direct this order to thedesignated market maker, as before, is disregarded, and the processterminates as indicated at 388.

Once the process finalizes processing at step 368, there is assurancethat the pending directed cross will not trade through the NBB. However,the process must also check to verify that the pending directed crosswill not trade through the NBO either. As such, the process continues tostep 374, where it checks if the incoming directed buy order has anyrouting restrictions. As previously described, some directed order types(e.g., sweep limit and sweep market orders) are eligible to route withno restrictions, while other directed order types are not eligible toroute at all (e.g., exchange-restricted and IOC orders). Still otherdirected order types can only route at the NBBO (e.g., inside market andinside limit orders). If the incoming directed buy order type has anyrouting restrictions, then the process must check that the price of thepending directed cross will not cause a trade-through violation of theNBO and that the directed cross is allowed according to the rules of theorder type underlying the directed buy order. The process does this byretrieving the best away market offer at step 376 and comparing it tothe DirectedCrossPrice parameter at step 378.

If, at step 378, the process determines that the best away market offeris lower (better) than the derived DirectedCrossPrice parameter, thenthe process proceeds to step 380, where it checks if the incomingdirected buy order is eligible to execute against its paired guaranteesell order at the derived, inferior directed cross price without causinga trade-through violation. For example, in certain issues (e.g., certainvery liquid ETFs on the equities markets), market rules permit certainorders to trade through the NBBO by a specified price increment, e.g., 3cents. Such an execution does not violate trade-through rules. Equitiesmarket rules currently allow exchange-restricted orders and IOC ordersto trade through the NBBO by three cents, as these order types cannotroute and would otherwise be canceled.

If, at step 380, the process determines that the incoming directed buyorder cannot execute against the resting guarantee sell order withoutviolating trade-through rules and/or the rules of the underlying buyorder type, then the process proceeds to step 386, where the incomingdirected buy order, again as described above, is automatically convertedto a non-directed buy order and is processed according to the rules ofthe regular continuous order matching process. The instruction to directthis buy order to the designated market maker is, therefore,disregarded, and the process terminates as indicated at step 388.

Referring again to step 380, if the process determines, however, thatthe incoming directed buy order can indeed execute against the restingguarantee sell order within the rules, then the process proceeds to step382, where the “Generate Matched Sell Instruction” routine 46 a isinvoked (FIG. 9A). The process also proceeds to step 382 to invoke the“Generate Matched Sell Instruction” routine 46 a if the process, at step378, determines that the retrieved best away market offer is greaterthan or equal to the DirectedCrossPrice parameter.

Referring again to step 374, if the process determines that the incomingdirected buy order type has no routing restrictions, then the processalso proceeds to step 382 from this step as well and the “GenerateMatched Sell Instruction” routine 46 a is invoked (FIG. 9A). By way ofexplanation and as described in detail below, if an incoming directedbuy order type has no routing restrictions, the process will simplyroute the order to all superior away market offers first beforeexecuting the pending directed cross.

Referring to FIG. 6B, in a process similar to process described abovefor determining if a directed buy order can trade, at step 450, the“Determine if Directed Sell Order Can Trade” routine 42b is activated,and at step 452, the process retrieves the virtual guarantee order book62 that the designated market maker 31 created, with order allocations,for the order sending firm 26 directing the order. Then, at step 454,the process retrieves the best (highest priced) resting guarantee buyorder from the guarantee order book 62. At step 456, the process thenretrieves the NBBO and proceeds to step 458. At step 458, the processdetermines whether the resting guarantee buy order's price is superiorto the NBB. If the price is not superior, then the process sets thepending directed cross price (“DirectedCrossPrice” parameter) equal tothe price of the resting guarantee buy order at step 464.

Referring again to step 458, if however, the price of the restingguarantee buy order is superior to (higher than) the NBB, then theprocess continues to step 460, where, in this embodiment, it checks ifthe business rules of the posting market center 20 allow the guaranteebuy order to be executed at its superior price. If the rules allow theorder to execute at the superior price, then the process continues tostep 464, where the process sets the DirectedCrossPrice parameter equalto the price of the resting guarantee buy order. Referring again to step460, if on the other hand, the rules of the posting market center 20 donot allow the order to execute at the superior price, then the processcontinues to step 462, where it caps the DirectedCrossPrice parameter bysetting it equal to the current NBB.

From steps 462 and 464, the process the proceeds to step 466, where theprocess compares the price of the incoming directed sell order to thederived DirectedCrossPrice parameter. If the process determines that theprice of the incoming directed sell order is higher, then the directedsell order is not marketable against the resting guarantee buy order.That being the case, the process proceeds to step 486, where theincoming directed sell order is automatically converted to anon-directed sell order and is processed according to the rules of theregular continuous order matching process. The instruction to directthis order to the designated market maker, therefore, is disregarded,and the process terminates as indicated at 488.

Referring back to step 466, if the process instead determines that theprice of the incoming directed sell order is less than or equal to thederived DirectedCrossPrice parameter, then the incoming directed sellorder is marketable against the resting guarantee buy order. Theprocess, as a result, continues to step 468, where it checks if thederived DirectedCrossPrice parameter is lower than the NBO. The reasonfor this check in this embodiment is because the guarantee buy order isbeing allowed, in some situations, to execute at a superior price andthat price may be so aggressive that it is actually greater than orequal to the NBO. If the price of the guarantee buy order is greaterthan or equal to the NBO, then it could cause a trade-through of the NBOif executed. At step 468, if the derived DirectedCrossPrice parameter islower than the NBO, then the pending directed cross can execute withouttrading through the NBO, so the process continues to step 474. If, onthe other hand, the derived DirectedCrossPrice parameter is not lowerthan the NBO, then the cross price may need to be adjusted to preventtrading through the NBO, and the process continues to step 470, where itdetermines whether the price of the pending directed cross should beadjusted.

If, at step 470, the process determines that according to the businessrules of the posting market center 20, the directed cross price can beadjusted, then the “Adjust Directed Cross Price for NBO Trade Through”routine 44 b is invoked as indicated at step 472 (FIG. 8B). If, however,at step 470, the process determines that the business rules of theposting market center 20 do not allow the price of the directed cross tobe adjusted, then the directed cross processing stops because thepending directed cross would trade through the NBO if allowed toexecute. As such, the process proceeds to step 486, where the incomingdirected sell order is automatically converted to a non-directed sellorder and is processed according to the rules of the regular continuousorder matching process. The instruction to direct this order to thedesignated market maker, as before, is disregarded, and the processterminates as indicated at 488.

Once the process finalizes processing at step 468, there is assurancethat the pending directed cross will not trade through the NBO. However,the process must also check to verify that the pending directed crosswill not trade through the NBB either. As such, the process continues tostep 474, where it checks if the incoming directed sell order has anyrouting restrictions. As previously described, some directed order types(e.g., sweep limit and sweep market orders) are eligible to route withno restrictions, while other directed order types are not eligible toroute at all (e.g., exchange-restricted and IOC orders). Still otherdirected order types can only route at the NBBO (e.g., inside market andinside limit orders). If the incoming directed sell order type has anyrouting restrictions, then the process must check that the price of thepending directed cross will not cause a trade-through violation of theNBB and that the directed cross is allowed according to the rules of theorder type underlying the directed sell order. The process does this byretrieving the best away market bid at step 476 and comparing it to theDirectedCrossPrice parameter at step 478.

If, at step 478, the process determines that the best away market bid ishigher (better) than the derived DirectedCrossPrice parameter, then theprocess proceeds to step 480, where it checks if the incoming directedsell order is eligible to execute against its paired guarantee buy orderat the derived, inferior directed cross price without causing atrade-through violation. As described above, certain issues allowexchange-restricted orders and IOC orders to trade through the NBBO bythree cents, as these order types cannot route and would otherwise becanceled.

If, at step 480, the process determines that the incoming directed sellorder cannot execute against the resting guarantee buy order withoutviolating trade-through rules and/or the rules of the underlying sellorder type, then the process proceeds to step 486, where the incomingdirected sell order, again as described above, is automaticallyconverted to a non-directed sell order and is processed according to therules of the regular continuous order matching process. The instructionto direct this sell order to the designated market maker is, therefore,disregarded, and the process terminates as indicated at step 488.

Referring again to step 480, if the process determines, however, thatthe incoming directed sell order can indeed execute against the restingguarantee buy order within the rules, then the process proceeds to step482, where the “Generate Matched Buy Instruction” routine 46b is invoked(FIG. 9B). The process also proceeds to step 482 to invoke the “GenerateMatched Buy Instruction” routine 46b if the process, at step 478,determines that the retrieved best away market bid is less than or equalto the DirectedCrossPrice parameter.

Referring again to step 474, if the process determines that the incomingdirected sell order type has no routing restrictions, then the processalso proceeds to step 482 from this step as well and the “GenerateMatched Buy Instruction” routine 46b is invoked (FIG. 9B). By way ofexplanation and as described in detail below, if an incoming directedsell order type has no routing restrictions, the process will simplyroute the order to all superior away market bids first before executingthe pending directed cross.

Adjust Directed Cross Price for Possible NBB/NBO Trade Through

As described above, if a resting guarantee order is priced veryaggressively, it could result in a trade-through of either the NBB orthe NBO if the pending directed cross were to execute at the guaranteeorder price. FIGS. 8A and 8B illustrate processes implemented in thisembodiment wherein the price of the pending directed cross may beadjusted to prevent a trade-through from occurring.

Referring specifically to FIG. 8A, at step 500, the “Adjust DirectedCross Price for NBB Trade Through” routine 44 a is invoked because thedirected order process recognizes that the pending directed cross pricemay need to be adjusted to prevent an NBB trade through. The adjustmentdepends on whether the best trading interest is on or off the postingmarket center 20. At step 502, the process retrieves the best(highest-priced) bid in the internal book. At step 504, the processchecks if the retrieved bid is a posted buy order or an away marketquote. If the bid is a posted buy order, then the process proceeds tostep 506 and derives the adjusted directed cross price by retrieving astored minimum price improvement increment. The minimum priceimprovement increment is configured according to the rules of theposting market center 20 and is generally set to one tick. In thisembodiment of the disclosure, the minimum price improvement increment isset to a penny. The process then proceeds to step 508 where the processadds the value of the minimum price improvement increment to the priceof the retrieved posted buy order to derive the DirectedCrossPriceparameter.

If, at step 504, the process determines, however, that the bid is anaway market quote, then the process derives the DirectedCrossPriceparameter by setting it equal to the away market's bid price, asindicated at step 510. By way of explanation, a directed cross is ableto execute at the NBB if an away market is alone at the NBB, but adirected cross is not able to execute at the NBB if a posted buy orderis at the NBB because this would cause a trade-through. The reason isthat a posted buy order always has time priority over an incomingdirected buy order at the same price and, therefore, the posted buyorder must execute first. However, as explained above, a posted buyorder cannot execute against a guarantee sell order. Therefore, theprice of the pending directed cross must be improved so that it is at aprice superior to the price of the posted buy order—which is why theminimum price improvement increment is necessary in this situation.

Once the DirectedCrossPrice parameter is set, the process continues tostep 512, where the process checks if the derived DirectedCrossPriceparameter is now higher than the incoming directed buy order price. Ifthe DirectedCrossPrice parameter was adjusted in the previous step, thenit is possible that the incoming directed buy order's price is now toolow to match its paired guarantee sell order. If that is the case, theprocess proceeds to step 516, where the incoming directed buy order isautomatically converted to a non-directed buy order and is processedaccording to the rules of the regular continuous order matching process.As before, the instruction to direct this order to the designated marketmaker is, therefore, disregarded, and the process terminates asindicated at 518.

Referring again to step 512, if the process, however, determines thatthe derived DirectedCrossPrice parameter is not higher than the incomingdirected buy order's price, then the incoming directed buy order and theresting guarantee sell order are still eligible to participate in thepending directed cross. In this case, the process continues to step 514,where it returns to the step 372 in FIG. 6A.

Referring now to FIG. 8B, in a process similar to the process describedabove for adjusting the directed cross price in view of a potential NBBtrade through, at step 600, the “Adjust Directed Cross Price for NBOTrade Through” routine 44b is invoked because the directed order processrecognizes that the pending directed cross price may need to be adjustedto prevent an NBO trade through. The adjustment depends on whether thebest trading interest is on or off the posting market center 20. At step602, the process retrieves the best (lowest-priced) offer in theinternal book. At step 604, the process checks if the retrieved offer isa posted sell order or an away market quote. If the bid is a posted sellorder, then the process proceeds to step 606 and derives the adjusteddirected cross price by retrieving a stored minimum price improvementincrement. In this embodiment of the disclosure, the minimum priceimprovement increment is set to a penny. The process then proceeds tostep 608 where the process subtracts the value of the minimum priceimprovement increment from the price of the retrieved posted sell orderto derive the DirectedCrossPrice parameter.

If, at step 604, the process determines, however, that the bid is anaway market quote, then the process derives the DirectedCrossPriceparameter by setting it equal to the away market's offer price, asindicated at step 610. Similar to the explanation above with respect tothe relationship between a buy order and the NBB, a directed cross isable to execute at the NBO if an away market is alone at the NBO, but adirected cross is not able to execute at the NBO if a posted sell orderis at the NBO because this would cause a trade-through. The reason isthat a posted sell order always has time priority over an incomingdirected sell order at the same price and, therefore, the posted sellorder must execute first. However, as explained above, a posted sellorder cannot execute against a guarantee buy order. Therefore, the priceof the pending directed cross must be improved so that it is at a pricesuperior to the price of the posted sell order—which is why the minimumprice improvement increment is necessary in this situation.

Once the DirectedCrossPrice parameter is set, the process continues tostep 612, where the process checks if the derived DirectedCrossPriceparameter is now lower than the incoming directed sell order price. Ifthe DirectedCrossPrice parameter was adjusted in the previous step, thenit is possible that the incoming directed sell order's price is now toohigh to match its paired guarantee buy order. If that is the case, theprocess proceeds to step 616, where the incoming directed sell order isautomatically converted to a non-directed sell order and is processedaccording to the rules of the regular continuous order matching process.As before, the instruction to direct this order to the designated marketmaker is, therefore, disregarded, and the process terminates asindicated at 618.

Referring again to step 612, if the process, however, determines thatthe derived DirectedCrossPrice parameter is not lower than the incomingdirected sell order's price, then the incoming directed sell order andthe resting guarantee buy order are still eligible to participate in thepending directed cross. In this case, the process continues to step 614,where it returns to the step 472 in FIG. 6B.

Create a Match Instruction Linking/Pairing the Directed Order withRetrieved Guarantee Order

Once the process has determined that the incoming directed order iseligible to cross with its paired contra-side guarantee order and thatthe derived DirectedCrossPrice parameter will neither trade through theNBBO nor violate any trading rules specific to the incoming directedorder type, then the incoming directed order and the retrievedcontra-side guarantee order are finally linked together in a directedcross order instruction. FIGS. 9A and 9B illustrate processesimplemented in this embodiment wherein the process pulls the eligiblecontra-side guarantee order from the appropriate guarantee order bookand pairs it with the incoming directed order to construct a directedcross order instruction. The directed cross order is a two-sidedinstruction to the order matching engine 21 to execute the directedorder and its paired contra-side guarantee order at the price set by theDirectedCrossPrice parameter, up to a maximum quantity(“MaxCrossQuantity”) that is determined in this process.

Referring specifically to FIG. 9A, at step 530, the directed orderprocess activates the “Generate Matched Sell Instruction” routine 46 a.Then, at step 532, the process compares the size of the incomingdirected buy order to the size of the resting guarantee sell order. Ifthe incoming directed buy order size is lower, then the processcontinues to step 534, where it pulls a portion of the quantity of theguarantee sell order size equal to the incoming directed buy order'ssize from the book 62 and sets the maximum quantity which can cross(MaxCrossQuantity parameter) equal to the size of the incoming directedbuy order's size at step 536. The remaining portion of the restingguarantee sell order is not needed for the pending directed cross andremains in the guarantee order book 62, where it is available formatching with other incoming directed buy orders.

Referring again to step 532, if on the other hand, the size of theincoming directed buy order is greater than or equal to the availablesize of the resting guarantee sell order, then the process pulls thefull available quantity of the guarantee sell order as indicated at step538. If the resting guarantee sell order has a reserve quantity, thenthe process replenishes the guarantee sell order up to its Show Size(i.e., the maximum size available for matching with a directed order) asindicated at step 540. If the resting guarantee sell order does not havea reserve quantity, then the process pulls the entire order, removingthe depleted order from the guarantee order book 62. Then, at step 542,the process sets the MaxCrossQuantity parameter equal to the size of thepulled guarantee sell order, which can be less than the incomingdirected buy order. Any excess quantity of the incoming directed buyorder which is unexecuted after the directed cross concludes isprocessed in the regular continuous order matching process as if it werea non-directed buy order.

Once the MaxCrossQuantity parameter has been determined and theguarantee sell order has been pulled up to the MaxCrossQuantityparameter, the process, at step 546, appends a matched sell instructionto the incoming directed buy order. The matched sell instructionindicates the identity of the paired guarantee sell order, theMaxCrossQuantity parameter and the DirectedCrossPrice parameter. Theconstructed order is the two-sided directed cross order instruction.

At step 548, the process then momentarily ranks the paired guaranteesell order side of the two-sided directed cross order instruction in theinternal book according to the price/time priority of theDirectedCrossPrice parameter. This is required so that the priority ofthe guarantee sell order can be determined in relation to themarketplace. The guarantee sell order is ranked behind all displayedsell orders at the same price, but ahead of all nondisplayed (“working”)sell orders at the same price, and ahead of all away market offers atthe same price. The process continues to step 550, where the “PresentDirected Buy to Internal Book” routine 48 a is invoked (FIG. 10A).

Referring now to FIG. 9B, in a process similar to the process describedabove for pairing directed buy orders with guarantee sell orders, atstep 630, the directed order process activates the “Generate Matched BuyInstruction” routine 46 b. Then, at step 632, the process compares thesize of the incoming directed sell order to the size of the restingguarantee buy order. If the incoming directed sell order size is lower,then the process continues to step 634, where the process pulls aportion of the quantity of the guarantee buy order size equal to theincoming directed sell order's size from the book 62 and sets themaximum quantity which can cross (MaxCrossQuantity parameter) equal tothe size of the incoming directed sell order's size at step 636. Theremaining portion of the resting guarantee buy order is not needed forthe pending directed cross and remains in the guarantee order book 62,where it is available for matching with other incoming directed sellorders.

Referring again to step 632, if, on the other hand, the size of theincoming directed sell order is greater than or equal to the availablesize of the resting guarantee buy order, then the process pulls the fullavailable quantity of the guarantee buy order as indicated at step 638.If the resting guarantee buy order has a reserve quantity, then theprocess replenishes the guarantee buy order up to its Show Size (i.e.,the maximum size available for matching with a directed order) asindicated at step 640. If the resting guarantee buy order does not havea reserve quantity, then the process pulls the entire order, removingthe depleted order from the guarantee order book 62. Then, at step 642,the process sets the MaxCrossQuantity parameter equal to the size of thepulled guarantee buy order, which can be less than the incoming directedsell order. Any excess quantity of the incoming directed sell orderwhich is unexecuted after the directed cross concludes is processed inthe regular continuous order matching process as if it were anon-directed sell order.

Once the MaxCrossQuantity parameter has been determined and theguarantee buy order has been pulled up to the MaxCrossQuantityparameter, the process, at step 646, appends a matched buy instructionto the incoming directed sell order. The matched buy instructionindicates the identity of the paired guarantee buy order, theMaxCrossQuantity parameter and the DirectedCrossPrice parameter. Theconstructed order is the two-sided directed cross order instruction.

At step 648, the process then momentarily ranks the paired guarantee buyorder side of the two-sided directed cross order instruction in theinternal book according to the price/time priority of theDirectedCrossPrice parameter. This is required so that the priority ofthe guarantee buy order can be determined in relation to themarketplace. The guarantee buy order is ranked behind all displayed buyorders at the same price, but ahead of all nondisplayed (“working”) buyorders at the same price, and ahead of all away market bids at the sameprice. The process continues to step 650, where the “Present DirectedSell to Internal Book” routine 48 b is invoked (FIG. 10B).

Present Directed Order to Contra Side of the Internal Book

After a match instruction is appended to a directed order, the directedorder is presented to the contra side of the internal book. Theguarantee order paired with the directed order is momentarily ranked inthe internal book in price/time priority while its contra paireddirected order sweeps any superior bids or offers. If the pairedguarantee order is the best ranked order in the internal book, then thedirected order and its paired guarantee order can cross cleanly withoutany market interaction. If, on the other hand, the guarantee order isnot the best ranked order in the internal book, then the directed ordermust first interact with all higher-priority contra trading interestbefore it can cross the guarantee order. The directed order processcontemporaneously executes against all higher-priority trading interest,starting with the best-priced bid or offer and including all pricelevels until the paired guarantee order is detected.

The explanation that follows explains how, in this embodiment, thedirected order process determines which bids and offers are superior tothe guarantee order. Within the posting market center 20, the ordermatching engine 21 maintains an internal book of all orders resident onposting market center 20 (referred to as book orders herein) and the BBO(the Top of Book quote) of each away market (referred to as away marketquotes herein). Bids and offers reside on two separate lists. In thisembodiment, these lists are ranked according to price/time priority asfollows: all orders and quotes are ranked according to price priority,with the highest-priced bid (lowest-priced offer) having priority overall inferior bids (offers); within each price level, book orders areranked in time priority, but with a preference given to displayedtrading interest over nondisplayed (“working”) trading interest; withineach price level, book orders always have priority over away marketquotes and within each price level, away market quotes are rankedaccording to the posting market center's business rules. The pairedguarantee order is ranked in price/time priority behind all displayedresident trading interest at the same price, but ahead of allnondisplayed resident trading interest at the same price. When aguarantee order resides ‘unpaired’ in the guarantee order book 62, ithas no standing and no execution priority.

Within each price level, in this embodiment, resting book orders areranked as follows in the internal book and may be thought of as“residing” in a corresponding order execution process:

Displayed Orders

“Working” Orders (not displayed), which include, if present:

-   -   Reserve sizes of Displayed Orders    -   Passive Liquidity Orders    -   Discretionary prices of Displayed Orders    -   Tracking Liquidity Orders

Thus, at any given price, displayed orders “reside” in the displayprocess and are ranked first; the reserve portions of displayed ordersreside in the working process (the reserve sub-process) and are rankedsecond; passive liquidity orders reside in the working process (theliquidity sub-process) and are ranked third; the discretionary prices ofdisplayed orders reside in the working process (the discretionarysub-process) and are ranked fourth; and tracking liquidity orders residein the working process (the tracking sub-process) and are ranked fifth.Passive liquidity orders are described and disclosed in co-pending U.S.patent application Ser. No. 11/416,756, which is incorporated byreference herein. Similarly, tracking liquidity orders are described anddisclosed in co-pending U.S. patent application Ser. No. 11/416,943,which is incorporated by reference herein.

For example, the following orders are ranked in this priority in regardto executing at the price of $20.00:

Rank Order Details 1 Order A: Buy 100 @ 20.00 2 Order B: Buy 500 @20.00, Display Size = 100, Reserve Size = 400 3 Order C: Buy 100 @20.00, Passive Liquidity 4 Order D: Buy 100 @ 19.99, with Discretion to20.00 5 Order E: Buy 100 @ 20.00, Tracking Liquidity

If the NBB is $20.00 and away market A is also at the NBB, an incomingorder to sell 900 at $20.00 would execute against the buy orders in thesequence shown above. Fully-displayed Order A would execute first,partly-displayed Order B would execute next (100 Displayed+400 Reserve),nondisplayed Order C would execute next, Order D would step up to itsdiscretionary price of $20.00 and execute next, and lastly nondisplayedOrder E would execute to prevent the incoming sell order from routing toaway market A.

When a guarantee order is marketable against an incoming directed order,the directed order process momentarily ranks the paired guarantee orderwith other orders at the same price level as shown below, behind alldisplayed orders but ahead of all nondisplayed orders:

Displayed Orders

Guarantee Order →

“Working” Orders (not displayed), which include, if present:

-   -   Reserve sizes of Displayed Orders    -   Passive Liquidity Orders    -   Discretionary prices of Displayed Orders    -   Tracking Liquidity Orders

Continuing from the previous example, if an incoming directed sell orderis paired with a guarantee order to buy 200 at $20.00, the guaranteeorder side of the resulting directed cross order is momentarily rankedas follows in regard to execution opportunities:

Rank Order Details 1 Order A: Buy 100 @ 20.00 2 Order B: Buy 100 @20.00, Displayed Size 3 Guarantee Order: Buy 200 @ 20.00 ← 4 Order B:Buy 400 @ 20.00, Reserve Size 5 Order C: Buy 100 @ 20.00, PassiveLiquidity 6 Order D: Buy 100 @ 19.99, with Discretion to 20.00 7 OrderE: Buy 100 @ 20.00, Tracking Liquidity

In this example, the guarantee buy order is momentarily ranked behindthe displayed portion of Order B, but ahead of the reserve(nondisplayed) portion of Order B. The directed sell order side of thedirected cross order must execute Order A fully, then must execute thedisplayed portion of Order B fully, and only then can execute againstthe paired guarantee order. If any portion of the directed sell orderremains after executing against the paired guarantee buy order, then itis automatically converted to a non-directed sell order, and continuesto execute the reserve portion of Order B, and so forth. As illustratedin this example, the guarantee order has lower priority than alldisplayed resident trading interest at the same price, but higherpriority than non-displayed (“Working”) resident trading interest at thesame price.

However, if passive liquidity order C is priced at $20.01 instead of$20.00, then the NBB is still $20.00 because passive liquidity ordersare not displayed to the marketplace nor included in the posting marketcenter's BBO. In this example, the orders are ranked as followsaccording to price/time priority:

Rank Order Details 1 Order C: Buy 100 @ 20.01, Passive Liquidity 2 OrderA: Buy 100 @ 20.00 3 Order B: Buy 100 @ 20.00, Displayed Size 4Guarantee Order: Buy 200 @ 20.00 ← 5 Order B: Buy 400 @ 20.00, ReserveSize 6 Order D: Buy 100 @ 19.99, with Discretion to 20.00 7 Order E: Buy100 @ 20.00, Tracking Liquidity

The directed sell order side of the directed cross order must executeOrder C folly, then must execute Order A fully, then must execute thedisplayed portion of Order B fully, and only then can execute againstthe paired guarantee order. If any portion of the directed sell orderremains after execution against the paired guarantee buy order, then itis automatically converted to a non-directed sell order, and continuesto execute the reserve portion of Order B, and so forth.

It should be understood that the description of the ranked orderexecution processes and sub-processes herein is only meant to illustratethe logical processing concepts and does not imply a physicalimplementation. The purpose of describing separate processes herein isto illustrate how various order types have priority over other ordertypes within the order matching engine 21. It should also be understoodthat the posting market center 20 may choose not to support all of theWorking Process order types described above, e.g., it may, for whateverreason, not allow passive liquidity orders. Such a decision does notaffect the ranking of guarantee orders in regard to the Display Processor in regard to the remaining Working Process order types that aresupported.

FIGS. 10A and 10B illustrate processes implemented in this embodimentwherein the process presents the directed order to the contra side ofthe internal book, and the process executes all superior tradinginterest in the marketplace before crossing any part of the pairedguarantee order and then crossing any unexecuted portion of the directedorder with the guarantee order. Referring specifically to FIG. 10A,after the process momentarily ranks the guarantee sell order in theinternal book as described above, it is ready to execute the incomingdirected buy order by presenting it to the internal book, as indicatedat step 560. At step 562, the process retrieves the best offer in theinternal book. Then, at step 566, the process checks if the retrievedbest offer is the guarantee sell order that the directed buy order waspaired with. If the retrieved best offer is indeed the paired guaranteesell order, then the process continues to step 564, where it executesthe directed cross. The process executes the incoming directed buy orderagainst the paired guarantee sell order at the computed price set in theDirectedCrossPrice parameter and up to the quantity set in theMaxCrossQuantity parameter.

After executing the directed cross, the process continues to step 582,where it checks if the guarantee sell order was fully traded or not. Itshould be noted that, in this embodiment, if the guarantee sell order issuperior to all other offers in the marketplace, then the incomingdirected buy order executes with the guarantee sell order completelybecause no sell orders or away market offers break up the directed crosstransaction. If the guarantee sell order is fully traded, then theprocess proceeds to step 586, where it checks if the incoming directedbuy order still has quantity remaining to trade. If the incomingdirected buy order does not have any remaining quantity, then theprocess terminates as indicated at 590. If, however, the incomingdirected buy order does still have quantity available to trade, then theprocess continues to step 588, where the remaining portion of theincoming directed buy order is automatically converted to a non-directedbuy order and is processed according to the rules of the regularcontinuous order matching process. The instruction to direct this orderto the designated market maker is then disregarded, and the processterminates as indicated at 590.

Referring again to step 566, if the retrieved best offer is not thepaired guarantee sell order, then the incoming directed buy order mustfirst execute against any superior trading interest in the marketplace.The process proceeds to step 568 where the process determines if theretrieved best offer is a regular (book) sell order. If it is, then theprocess matches the incoming directed buy order with the posted sellorder at the sell order's price, as indicated at step 580. The processthen continues on to check if the directed buy order still has quantityremaining at step 576. If, at step 568, the process determines, however,that the best offer is not a sell order, then it is an away market quoteinstead. The process, therefore, proceeds to step 570 where the processchecks if the incoming directed buy order can be routed. If the ordertype of the directed order cannot route, then the process proceeds tostep 578 to retrieve the next best offer and returns to step 566. If, atstep 570, the order type of the directed order can route, then theprocess continues to step 572, where it checks if the away market offeris already “locked down.” An away market quote is considered to be fullylocked down if the order matching engine 21 has already routed one ormore commitments (on behalf of one or more prior underlying orders) tothe away market at its quote price at a quantity equal to its publishedquote size, and the away market has not moved its quote yet. If the awaymarket offer is fully locked down, then the incoming directed order isnot required to route to the away market offer, and the processcontinues to step 578, where it retrieves the next best offer andreturns to step 566.

If, at step 572, however, the away market offer is not fully lockeddown, then the process continues to step 574, where it routes the lesserof the incoming directed buy order's leaves quantity and the size of theaway market offer that is not yet locked down. If, for example, an awaymarket center is currently offering 500 shares but the order matchingengine 21 has previously routed 200 shares to it and is awaiting thefill, then 300 shares are not yet locked down, and the process routes300 shares of the incoming directed order to the away market center.However, if the incoming directed order only has 200 shares remaining,then the process only routes 200 shares instead. As it may take up to 30seconds to receive a response from a slow market center, the processdoes not wait for a response in this embodiment and proceeds immediatelyto step 576. If any shares of the routed commitment are declined by theaway market, they are returned to the (now) non-directed order, andprocessed in the continuous order matching process.

At step 576, the process checks if the incoming directed buy order stillhas quantity remaining to trade after it has interacted with themarketplace. If it does not, then the process continues to step 584,where the process returns the unexecuted portion of the guarantee sellorder to the guarantee book. The process then terminates as indicated atstep 590.

Referring again to step 576, if, however, the incoming directed buyorder does still have quantity available to trade, then the processcontinues to step 578, where it retrieves the next-best offer in theinternal book and returns to step 566. At step 566, the process checksif this next-best offer is the paired guarantee sell order. If it is,then the process executes the directed cross at step 564, checks if theguarantee sell order is fully traded at step 582, and either returns theunmatched portion of the guarantee sell order to the guarantee orderbook at step 584 or else checks if the incoming directed buy order stillhas quantity remaining to execute at step 586, as described above. If,on the other hand, at step 566 the next-best offer is not the pairedguarantee sell order, then the process continues to step 568, where itchecks if it is a sell order or an away market quote. The processcontinues in this fashion, matching posted book sell orders and/orrouting to away market offers, until the incoming directed buy order iseither depleted (without ever having crossed any part of the guaranteesell order) or else finally executes against the paired guarantee sellorder at step 564. Matching the remaining portion of a directed buyorder with a paired guarantee sell order is contemporaneous with theinternal book marketplace interaction, i.e., if any shares of thedirected order were routed to superior away markets, the directed orderprocess does not wait for a response before executing the directedcross.

Referring now to FIG. 10B, in a process similar to the process describedabove for presenting a directed buy order to the internal book, at step660, the process for presenting a directed sell order to the internalbook is initiated. At step 662, the process retrieves the best bid inthe internal book. Then, at step 666, the process checks if theretrieved best bid is the guarantee buy order that the directed sellorder was paired with. If the retrieved best bid is indeed the pairedguarantee buy order, then the process continues to step 664, where itexecutes the directed cross. The process executes the incoming directedsell order against the paired guarantee buy order at the computed priceset in the DirectedCrossPrice parameter and up to the quantity set inthe MaxCrossQuantity parameter.

After executing the directed cross, the process continues to step 682,where it checks if the guarantee buy order was fully traded or not. Itshould be noted that, in this embodiment, if the guarantee buy order issuperior to all other offers in the marketplace, then the incomingdirected sell order executes with the guarantee buy order completelybecause no buy orders or away market bids break up the directed crosstransaction. If the guarantee buy order is fully traded, then theprocess proceeds to step 686, where it checks if the incoming directedsell order still has quantity remaining to trade. If the incomingdirected sell order does not have any remaining quantity, then theprocess terminates as indicated at 690. If, however, the incomingdirected sell order does still have quantity available to trade, thenthe process continues to step 688, where the remaining portion of theincoming directed sell order is automatically converted to anon-directed sell order and is processed according to the rules of theregular continuous order matching process. The instruction to directthis order to the designated market maker is then disregarded, and theprocess terminates as indicated at 690.

Referring again to step 666, if the retrieved best bid is not the pairedguarantee buy order, then the incoming directed sell order must firstexecute against any superior trading interest in the marketplace. Theprocess proceeds to step 668 where the process determines if theretrieved best bid is a regular (book) buy order. If it is, then theprocess matches the incoming directed sell order with the posted buyorder at the buy order's price, as indicated at step 680. The processthen continues on to check if the directed sell order still has quantityremaining at step 676. If, at step 668, the process determines, however,that the best bid is not a buy order, then it is an away market quoteinstead. The process, therefore, proceeds to step 670 where the processchecks if the incoming directed sell order can be routed. If the ordertype of the directed order cannot route, then the process proceeds tostep 678 to retrieve the next best bid and returns to step 666. If, atstep 670, the order type of the directed order can route, then theprocess continues to step 672, where it checks if the away market bid isalready “locked down.” If the away market bid is fully locked down, thenthe incoming directed order is not required to route to the away marketbid, and the process continues to step 678, where it retrieves the nextbest bid and returns to step 666.

If, at step 672, however, the away market bid is not fully locked down,then the process continues to step 674, where it routes the lesser ofthe incoming directed sell order's leaves quantity and the size of theaway market bid that is not yet locked down. As it may take up to 30seconds to receive a response from a slow market center, the processdoes not wait for a response in this embodiment and proceeds immediatelyto step 676. If any shares of the routed commitment are declined by theaway market, they are returned to the (now) non-directed order, andprocessed in the continuous order matching process.

At step 676, the process checks if the incoming directed sell orderstill has quantity remaining to trade after it has interacted with themarketplace. If it does not, then the process continues to step 684,where the process returns the unexecuted portion of the guarantee buyorder to the guarantee book. The process then terminates as indicated atstep 690.

Referring again to step 676, if, however, the incoming directed sellorder does still have quantity available to trade, then the processcontinues to step 678, where it retrieves the next-best bid in theinternal book and returns to step 666. At step 666, the process checksif this next-best bid is the paired guarantee buy order. If it is, thenthe process executes the directed cross at step 664, checks if theguarantee buy order is fully traded at step 682, and either returns theunmatched portion of the guarantee buy order to the guarantee order bookat step 684 or else checks if the incoming directed sell order still hasquantity remaining to execute at step 686, as described above. If, onthe other hand, at step 666 the next-best bid is not the pairedguarantee buy order, the process continues to step 668, where it checksif it is a buy order or an away market quote. The process continues inthis fashion, matching posted book buy orders and/or routing to awaymarket bids, until the incoming directed sell order is either depleted(without ever having crossed any part of the guarantee buy order) orelse finally executes against the paired guarantee buy order at step664. Matching the remaining portion of a directed sell order with apaired guarantee buy order is contemporaneous with the internal bookmarketplace interaction, i.e., if any shares of the directed order wererouted to superior away markets, the directed order process does notwait for a response before executing the directed cross.

DETAILED EXAMPLES

Examples of how directed orders in a preferred embodiment of thedisclosure operate are provided below. It should be understood that theorder and quote prices and sizes discussed in these examples are by wayof example only to illustrate how the process of an embodiment of thedisclosure handles directed orders. Directed order behavior is notlimited to these examples.

In all the examples that follow, the DMM/OSF permissions table 60appears as follows:

Designated Market Maker Default Order Sending Firm Issue Firm (DMM) DMM?(OSF) XYZ FirmA FirmC XYZ FirmA Y FirmD XYZ FirmB Y FirmB XYZ FirmBFirmD

EXAMPLE 1 Primary Peg Guarantee Buy Order is Received

At the start of this example, the NBBO is $20.00 to $20.04. Market MakerFirm A 31 a sends the following guarantee order for Order Sending Firm C26 a:

-   -   →Guarantee Order 1: Buy 5000 @ Bid, Show Size=1000, Reserve        Size=4000, Guarantee Order for FirmC

Referring to FIG. 3A, at step 100, the process receives incomingGuarantee Buy Order 1, and then at step 102, the process retrieves theDMM/OSF permissions table data. At step 104, the process determines thatFirm A is permissioned to receive directed order flow from Firm C (thefirst row in the DMM/OSF permissions table 60) and can therefore submitguarantee orders intended for FirmC.

At step 106, the process then retrieves the virtual guarantee order book62 a that Firm A created for Firm C. As this is the first order of theday, the guarantee order book 62 a is empty. At step 108, the processchecks if there are any guarantee sell orders resting on the guaranteeorder book 62 a. As none exist, the process proceeds to step 114.

At step 114, the process checks if any guarantee buy orders with thesame price as incoming Guarantee Buy Order 1 are already resting on theguarantee order book 62 a. As there are none, the process, at step 116,inserts incoming Guarantee Buy Order 1 into the guarantee order book62a, and the process is completed, as indicated at step 118.

At this point, the guarantee order book 62a looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Order 1: Buy 5000 @ Bid, Show Size = 1000, Reserve Size= 4000

EXAMPLE 2 Limit Guarantee Buy Order is Received

Continuing from the previous example, Market Maker Firm A 31 a sends asecond guarantee buy order for Order Sending Firm C 26 a:

-   -   →Guarantee Order 2: Buy 300 @ 15.00, Guarantee Order for FirmC

As before, at step 100, the process receives Guarantee Buy Order 2. Atstep 102, the process then retrieves the DMM/OSF permissions table 60,and at step 104, the process again determines that Firm A ispermissioned to received directed order flow from Firm C and cantherefore submit guarantee orders intended for Firm C.

At step 106, the process, as result, retrieves the guarantee order book62 a that Firm A created for Firm C. At step 108, the process checks ifany guarantee sell orders have been stored yet. As none exist, itproceeds to step 114. At step 114, the process checks if any guaranteebuy orders with the same price as incoming Guarantee Buy Order 2 arealready on the book 62 a. The process determines that the current priceof resting Guarantee Buy Order 1 is $20.00, as the order is pegged tothe bid and the NBBO is currently $20.00 to $20.04 in this example. Asincoming Guarantee Buy Order 2 is priced at $15.00, the order prices aredifferent and the process continues to step 116.

As incoming Guarantee Buy Order 2's price ($15.00) is different fromresting Guarantee Buy Order 1's price ($20.00), the process insertsincoming Guarantee Buy Order 2 in the guarantee order book 62a inprice/time priority, and the process is completed in step 118.

The guarantee order book 62 a looks like this at this point:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Order 1: Buy 5000 @ Bid, Show Size = 1000, Reserve Size= 4000 Guarantee Order 2: Buy 300 @15.00 ←

EXAMPLE 3 Primary Peg Guarantee Sell Order is Received

Continuing from the previous examples, Market Maker Firm A 31 a sendsthe following guarantee sell order for Order Sending Firm C 26 a:

-   -   →Guarantee Order 3: Sell 4000 @ Offer, Show Size=900, Reserve        Size=3100, Guarantee Order for FirmC

Referring to FIG. 3B, at step 200, the process receives incomingGuarantee Sell Order 3. At step 202, the process retrieves the DMM/OSFpermissions table 60. At step 204, the process determines that Firm A ispermissioned to received directed order flow from Firm C and cantherefore submit guarantee orders intended for Firm C.

At step 206, the process again retrieves the guarantee order book 62 athat Firm A created for Firm C. At step 208, the process checks if anyguarantee buy orders exist in the guarantee order book 62 a yet. AsGuarantee Buy Orders 1 and 2 are currently resting in the order book 62a, the process continues to step 210 and retrieves Guarantee Buy Order1, the best (highest-priced) guarantee buy order.

At step 212, the process compares the price of incoming Guarantee SellOrder 3 to the price of resting Guarantee Buy Order 1. The NBBO iscurrently $20.00 to $20.04, which means resting Guarantee Buy Order 1 iscurrently priced at $20.00 and incoming Guarantee Sell Order 3 iscurrently priced at $20.04. As incoming Guarantee Sell, Order 3's price($20.04) is higher than resting Guarantee Buy Order 1's price ($20.00),the process continues to step 214.

At step 214, the process checks if any guarantee sell orders with thesame price are resting on the guarantee order book 62 a. As no guaranteesell orders are presently resting on the guarantee order book 62 a yet,the process, at step 216, inserts incoming Guarantee Sell Order 3 in theguarantee order book 62 a, and the process is completed at step 218.

The guarantee order book 62 a presently looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Buy 5000 @ Bid, Guarantee Sell 4000 @ Offer, ← Order 1:Show Size = 1000, Order 3: Show Size = 900, Reserve Size = 4000 ReserveSize = 3100 Guarantee Buy 300 @ 15.00 Order 2:

EXAMPLE 4 Limit Guarantee Sell Order is Received

Continuing from the previous examples, Market Maker Firm A 31 sends thefollowing limit guarantee sell order for Order Sending Firm C 26 a:

-   -   →Guarantee Order 4: Sell 500 @ 30.00, Guarantee Order for FirmC

At step 200, the process receives incoming Guarantee Sell Order 4, andthen at step 202, the process retrieves the DMM/OSF permissions table60. As above, at step 204, the process determines that Firm A ispermissioned to received directed order flow from Firm C and cantherefore submit guarantee orders intended for Firm C.

At step 206, the process retrieves the guarantee order book 62 a thatFirm A created for Firm C, and at step 208, the process checks if anyguarantee buy orders are resting in the guarantee order book 62 a. AsGuarantee Buy Orders 1 and 2 are resting, the process continues to step210 and retrieves Guarantee Buy Order 1, the best (highest-priced)guarantee buy order.

At step 212, the process compares the price of the incoming GuaranteeSell Order 4 to the price of resting Guarantee Buy Order 1. The NBBO iscurrently $20.00 to $20.04, which means Guarantee Buy Order 1 iscurrently priced at $20.00. As incoming Guarantee Sell Order 4's price($30.00) is higher than resting Guarantee Buy Order 1's price ($20.00),the process continues to step 214.

At step 214, the process checks if any guarantee sell orders with thesame price are resting on the guarantee order book 62 a. The processdetermines that the current price of resting Guarantee Sell Order 3 is$20.04, as the order is pegged to the Offer and the NBBO is currently$20.00 to $20.04. As incoming Guarantee Sell Order 4 is priced at$30.00, the order prices are different, and the process inserts incomingGuarantee Sell Order 4 in the guarantee order book 62 a, and the processis completed as indicated at step 218.

The guarantee order book 62 a presently looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Buy 5000 @ Bid, Guarantee Sell 4000 @ Offer, Order 1:Show Size = 1000, Order 3: Show Size = 900, Reserve Size = 4000 ReserveSize = 3100 Guarantee Buy 300 @ 15.00 Guarantee Sell 500 @ 30.00 ← Order2: Order 4:

The NBBO is currently $20.00 to $20.04. The Guarantee Orders' currentprices and available sizes are as follows:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Buy 1000 @ 20.00, Guarantee Sell 900 @ 20.04 Order 1:Reserve Size = 4000 Order 3: Reserve Size = 3100 Guarantee Buy 300 @15.00 Guarantee Sell 500 @ 30.00 Order 2: Order 4:

EXAMPLE 5 Guarantee Order is Not Permissioned (no DMM/OSF Pair inPermissions Table)

Continuing from the previous examples, Market Maker A 31 a sends thefollowing guarantee order for a different firm, Order Sending Firm B 26c:

-   -   →Order 22: Buy 2000 @ 19.99, Guarantee Order for FirmB

At step 100, the process receives Guarantee Buy Order 22. Then at step102, the process retrieves the DMM/OSF permissions table 60. At step104, the process determines that Market Maker Firm A is not permissionedto received directed order flow from Order Sending Firm B. (Market MakerFirm A is only permissioned to receive directed order flow from FirmCand FirmD, as indicated in the first two rows of the DMM/OSF permissionstable 60.) Accordingly, Firm A cannot submit guarantee orders for FirmB. Therefore, at step 122, incoming Guarantee Sell Order 22 is rejectedback to Firm A, and the process is completed as indicated at step 124.

EXAMPLE 6 Directed Order is not Permissioned (no DMM/OSF Pair inPermissions Table)

Continuing from the previous example, Order Sending Firm C 26 a sendsthe following directed order for Market Maker Firm B 31 b:

-   -   →Order 23: Buy 500 @ Market, Directed Order for FirmB

Incoming Directed Buy Order 23 enters the process at step 300. Then, atstep 302, the process sets the OSF parameter to “FirmC”, the identifierof the order sending firm. Then, at step 304, the process retrieves theDMM/OSF permissions table 60.

At step 306, the process checks if incoming Directed Buy Order 23explicitly specifies a Designated Market Maker. As it does, at step 308,the process sets the DMM parameter to “FirmB”, the identifier specifiedon incoming Directed Buy Order 23. At step 310, the process looks in theDMM/OSF permissions table 60 to determine if Firm C is permissioned todirect orders to Firm B. The process determines that Firm C is notpermissioned to direct orders to Firm B. (Firm C is only permissioned todirect orders to Firm A, as indicated in the first row of the DMM/OSFpermissions table 60.) Therefore, at step 312, the directed orderprocess is suspended and incoming Directed Buy Order 23 is converted toa non-directed buy order and is passed to the regular continuous ordermatching process instead. In the regular continuous order matchingprocess, the buy order 23 executes against the marketplace in the samemanner as any other non-directed market order.

EXAMPLE 7 Directed Exchange-Restricted Buy Order is Permissioned, butFails Trade Through Test

Continuing from the previous example, Order Sending Firm D 26 b sendsthe following directed order for Market Maker Firm A 31 a:

-   -   →Order 24: Buy 1200 @ 20.02, Exchange-Restricted, Directed Order        for FirmA

Incoming Directed Buy Order 24 enters the process at step 300. Then, atstep 302, the process sets the OSF parameter to “FirmD”, the identifierof the order sending firm. At step 304, the process retrieves theDMM/OSF permissions table 60. At step 306, the process checks ifincoming Directed Buy Order 24 explicitly specifies a Designated MarketMaker. As it does, at step 308, the process sets the DMM parameter to“FirmA”, the identifier specified on the order. At step 310, the processlooks in the DMM/OSF permissions table 60 to determine if Firm D ispermissioned to direct orders to Firm A. As Firm D is indeedpermissioned to direct orders to Firm A, the process continues to step320 where the side of incoming Directed Buy Order 24 is checked. As itis a buy order, at step 322, the “Determine if Directed Buy Order CanTrade” routine 42 a is invoked, and the process continues to step 350 inFIG. 6A.

At step 352, the process retrieves the virtual guarantee order book 62 bthat Firm A has allocated exclusively for crossing with Firm D. Theguarantee order book 62 b created for Firm D appears as follows in thisexample:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmD Sell Orders forFirmD Guarantee Buy 900 @ 20.00 Guarantee Sell 700 @ 20.02 Order 5:Order 8: Guarantee Buy 1200 @ 19.99 Guarantee Sell 900 @ 20.03 Order 6:Order 9: Guarantee Buy 2000 @ 19.98 Guarantee Sell 1100 @ 20.04 Order 7:Order 10:

At step 354, the process retrieves the best (lowest priced) restingguarantee sell order, Guarantee Sell Order 8 in this example. At step356, then, the process retrieves the NBBO (19.99 to 20.00). At step 358,the process checks if Guarantee Sell Order 8's price is superior to theNBO. In this example, it is not superior. So, at step 364, the processsets the price of the pending cross (DirectedCrossPrice parameter) equalto $20.02, which is Guarantee Sell Order 8's price.

At step 366, the process then compares the price of incoming DirectedBuy Order 24 ($20.02) to the DirectedCrossPrice parameter ($20.02),Because they are equal, the process proceeds to step 368 where theprocess compares the DirectedCrossPrice parameter ($20.02) to the NBBprice ($19.99). As the DirectedCrossPrice parameter is higher than theNBB in this example, the directed cross is able to execute at this pricewithout being adjusted because it would not trade through the NBB. Theprocess continues to step 374, where it checks the order type ofincoming Directed Buy Order 24.

As incoming Directed Buy Order 24 is an exchange-restricted order inthis example, it cannot be routed off the posting market center bydefinition. The process, therefore, continues to step 376, where itretrieves the best away market offer price. As shown in the internalbook below, the best away market offer is on Away Market A.

-   -   →The NBBO is 19.99 to 20.00 (500×300)

The internal book, which contains the ranked lists of all book ordersand the BBO of each away market, looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket B: Bid 400 @ 19.98 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

At step 378, Away Market A's offer price ($20.00) is compared to theDirectedCrossPrice parameter ($20.02). As Away Market A's offer islower, the process continues to step 380, to check the trade-throughrules. According to the trade-through rules in this example, incomingDirected Buy Order 24 cannot trade through Away Market A, as this issuedoes not allow trade-throughs. As such, as an exchange-restricted order,incoming Directed Buy Order 24 can neither route to Away Market A norcan it trade through Away Market A's superior offer to match GuaranteeSell Order 8. Accordingly, the directed cross cannot execute.

As a result, incoming Directed Buy Order 24 is automatically convertedto a non-directed buy order and is given to the regular continuous ordermatching process as indicated at step 386. In the regular continuousorder matching process, Buy Order 24 cannot trade through Away Market Ato match posted Sell Orders 147 or 153 because it is anexchange-restricted order. For the same reason, Buy Order 24 cannot beposted at the price of $20.02 as that would cause a crossed NBBO.Therefore, incoming Buy Order 24 is rejected back to order sending firmFirm D, and the process terminates at step 388.

It should be noted that incoming Buy Order 24, a directedexchange-restricted order, executes in exactly the same manner in thisexample as a directed IOC order would have. Neither order type can routeoff the posting market center 20 and, therefore, must execute at theNBBO unless the issue allows trade-throughs up to a specified priceincrement (e.g., a 3 cent exemption). The difference between the twoorder types is that an IOC order is always canceled if it does notexecute, while an exchange-restricted order can be posted if it wouldnot lock or cross the market.

EXAMPLE 8 Directed Sweep Limit Buy Order Interacts with the Market andParticipates in the Directed Cross

This example is similar to the previous one, with one importantdifference—instead of sending a directed exchange-restricted order, theorder sending firm sends a directed sweep limit order. Even though thedirected orders in both examples have the same size and price, they areprocessed differently because of the rules governing their underlyingorder types. Because a sweep limit order can interact fully with themarketplace, the directed order in this example is not rejected as aboveand is able to trade with the designated market maker after it hasexecuted all superior trading interest first.

Specifically, Order Sending Firm D 26 b sends the following directedorder for Market Maker Firm A 31 a:

-   -   →Order 25: Buy 1200 @ 20.02, Sweep Limit, Directed Order for        FirmA

In this example, the guarantee order book 62 b and the internal book areexactly the same as in the previous example. Specifically, the guaranteeorder book 62 b looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmD Sell Orders forFirmD Guarantee Buy 900 @ 20.00 Guarantee Order 8: Sell 700 @ 20.02Order 5: Guarantee Buy 1200 @ 19.99 Guarantee Order 9: Sell 900 @ 20.03Order 6: Guarantee Buy 2000 @ 19.98 Guarantee Order 10: Sell 1100 @20.04 Order 7:

The internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket B: Bid 400 @ 19.98 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

Incoming Directed Buy Order 25 enters the process at step 300 andcontinues through step 368, exactly as described for Directed Buy Order24 in the prior example. For Directed Buy Order 25 in this example, theprocessing is different starting at step 374, where the processevaluates whether the order type has any routing restrictions. Whereasexchange-restricted orders cannot route off the posting market center20, sweep limit orders can. A directed sweep limit order can routecontemporaneously to all away markets whose quotes are marketableagainst the limit price. As Directed Buy Order 25 has no routingrestrictions, the process continues to step 382, where the “GenerateMatched Sell Instruction’ routine 46 a is invoked and then proceeds tostep 530 in FIG. 9A.

At step 532, the size of incoming Directed Buy Order 25 (1200 shares) iscompared to the size of the retrieved Guarantee Sell Order 8 (700shares). As the size of incoming Directed Buy Order 25 is greater, atstep 538, the process pulls (removes) Guarantee Sell Order 8 from theguarantee order book 62 b for potential matching. The updated guaranteeorder book 62 b then appears as follows:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmD Sell Orders forFirmD Guarantee Order 5: Buy 900 @ 20.00 Guarantee Sell 900 @ 20.03Order 9: Guarantee Order 6: Buy 1200 @ 19.99 Guarantee Sell 1100 @ 20.04Order 10: Guarantee Order 7: Buy 2000 @ 19.98

As Guarantee Sell Order 8 is not a reserve order, the process continuesto step 542, where it sets the MaxCrossQuantity to 700 shares, the sizeof Guarantee Sell Order 8. Then, at step 546, the process creates alogical link pairing incoming Directed Buy Order 25 and pulled GuaranteeSell Order 8. It does this by appending a ‘match instruction’ toincoming Directed Buy Order 25. The match instruction includesinformation required for the pending directed cross transaction, such asan identifier for Guarantee Sell Order 8, the MaxCrossQuantity parameterand the DirectedCrossPrice parameter. This is done to ensure thatincoming Directed Buy Order 25 recognizes pulled Guarantee Sell Order 8as the contra side of its directed cross when the Directed Buy Order 25encounters the Guarantee Sell Order 8 in the internal book's ranked listof offers. The Directed Cross Order instruction looks like this in thisexample:

Then, at step 548, the process momentarily ranks pulled Guarantee SellOrder 8 in the internal book according to the price/time priority of theDirectedCrossPrice parameter. As previously described, guarantee ordersare ranked behind all book orders superior or equal to theDirectedCrossPrice parameter and ahead of all away market quotes equalto the DirectedCrossPrice parameter. The internal book momentarily lookslike this:

Then, at step 550, the process invokes the “Present Directed Buy toInternal Book” routine 48 a and proceeds to step 560 in FIG. 10A.

At step 562, the process retrieves the best offer in the internal book,which in this example is from Away Market A. At step 566, the processchecks if the retrieved offer is its paired Guarantee Sell Order. As theretrieved offer is an Away Market A quote and not Guarantee Sell Order8, the process continues to step 568, where the process checks to see ifthe retrieved offer is a regular book sell order. As Away Market A'squote is not a sell order, the process continues to step 570, where itchecks if incoming Directed Buy Order 25 can be routed or not.

As incoming Directed Buy Order 25 is a sweep limit order, it is eligiblefor routing. The process continues to step 572, where it checks if AwayMarket A is already “locked down” or if it is eligible for routing. Asno quantity has previously been routed to Away Market A's present offer,the quote is not locked down and it is eligible for routing. At step574, the process, therefore, routes 300 shares (the offer size) at$20.00 (the offer price) to Away Market A. The updated internal bookmomentarily looks like this:

At step 576, then, the process checks if incoming Directed Buy Order 25still has shares available to trade. As it has 900 shares remaining, instep 578, the process retrieves the next best offer in the internalbook. The next best offer is Sell Order 147. The process then returns tostep 566, where it checks if the next best retrieved offer is pairedGuarantee Sell Order 8. As it is not, the process continues to step 568,where it checks if the retrieved offer is a regular book sell order.Sell Order 147 is indeed a regular book order. The process, therefore,continues to step 580, where it matches 100 shares of incoming DirectedBuy Order 25 with posted Sell Order 147 at $20.01 (i.e., Sell Order147's sell price). Posted Sell Order 147 is completely filled and isremoved from the internal book. The updated internal book momentarilylooks like this:

At step 576, the process checks if incoming Directed Buy Order 25 stillhas shares available to trade. As it has 800 shares remaining, theprocess at step 578 retrieves the next best offer in the internal book.The next best offer is Sell Order 153. The process returns to step 566,where it checks if this next best offer is paired Guarantee Sell Order8. As it is not in this example, the process continues to step 568,where it checks if this offer is a regular book sell order. Sell Order153 is a regular book order. The process continues to step 580, where itmatches 200 shares of incoming Directed Buy Order 25 with posted SellOrder 153 at $20.02, which is Sell Order 153's price. Posted Sell Order153 is completely filled and is removed from the internal book. Theupdated internal book momentarily looks like this:

Again at step 576, the process checks if incoming Directed Buy Order 25still has shares available to trade. It has 600 shares remaining in thisexample. Therefore, at 578, the process retrieves the next best offer inthe internal book. The next best offer is Guarantee Sell Order 8. Theprocess returns to step 566, where it checks if this next best retrievedoffer is paired Guarantee Sell Order 8. As it is in this example, theprocess continues to step 564, where the process crosses the remaining600 shares of incoming Directed Buy Order 25 with pulled Guarantee SellOrder 8 at $20.02, the DirectedCrossPrice parameter. Although the orderswere eligible to cross up to the MaxCrossQuantity of 700 shares,incoming Directed Buy Order 25 only had 600 shares remaining to match atthis point in the process.

At step 582, the process checks if pulled Guarantee Sell Order 8 isfully traded. As the order still has 100 unmatched shares, at step 584,the process removes Guarantee Sell Order 8 from the internal book'sranked list of offers. The process returns the unmatched shares ofGuarantee Sell Order 8 to the guarantee order book 62 b, where it iseligible to match with subsequent incoming directed buy orders. Theprocess is then terminated, as indicated at step 590. The updatedguarantee order book 62 b looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmD Sell Orders forFirmD Guarantee Buy 900 @ 20.00 Guarantee Order 8: Sell 100 @ 20.02 ←Order 5: Guarantee Buy 1200 @ 19.99 Guarantee Order 9: Sell 900 @ 20.03Order 6: Guarantee Buy 2000 @ 19.98 Guarantee Order 10: Sell 1100 @20.04 Order 7:

Once the directed order process terminates, any subsequent processingoccurs in the regular continuous order matching process. In thisexample, 15 seconds later, Away Market A fills 100 shares of the 300shares that were routed to it on behalf of underlying Directed Buy Order25, but declines 200 shares and fades its offer to 500 at $20.01. Asthis is a new offer, the continuous order matching process unlocks thequote. The updated internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order Buy 200 @ 19.99 Away Market A: Offer 500 @ 20.01 ←150: Away Market Bid 300 @ 19.99 Away Market B: Offer 200 @ 20.02 A:Away Market Bid 400 @ 19.98 Away Market C: Offer 400 @ 20.02 B: BookOrder Buy 100 @ 19.97 Book Order 143: Sell 100 @ 20.03 145: Away MarketBid 500 @ 19.97 Book Order 144: Sell 700 @ 20.03 C: Book Order Buy 200 @19.96 141: Book Order Buy 600 @ 19.96 151:

The 200 declined shares are returned to Buy Order 25. As the order is nolonger a directed order, it is processed as if it were a regular sweeplimit order. Specifically, Buy Order 25 is no longer allowed to crossany portion of the declined shares in the directed order process, whichhas terminated. The continuous order matching process routes the 200declined shares to Away Market A at its quote price of $20.01. AwayMarket A fills the routed shares, and the process is complete.

It should be noted that incoming Buy Order 25, a directed sweep limitorder, would execute in exactly the same manner in this example if itwere a directed sweep market order instead. Both order types can routecontemporaneously to multiple away markets at multiple price levels, andtherefore have no routing restrictions. The only difference between thetwo order types in this embodiment is that a directed sweep limit orderhas a limit price that caps how many price levels it can execute,whereas a directed sweep market order has no such cap.

EXAMPLE 9 Directed Inside Limit Buy Order Cannot Participate in DirectedCross Off the NBO

This example is similar to the previous one, except that instead ofsending a directed sweep limit order, the order, sending firm sends adirected inside limit order. The difference between a sweep limit orderand an inside limit order is that an inside limit order must execute atthe NBBO. As a result, a directed inside limit order can participate ina directed cross only if the directed cross is priced at the NBBO orbetter.

Specifically, Order Sending Firm D 26 b sends the following directedinside limit order to Market Maker Firm A 31 a:

-   -   →Order 26: Buy 1200 @ 20.02, Inside Limit, Directed Order for        FirmA

In this example, the guarantee order book 62 b and the internal book arethe same as at the start of the previous example. The guarantee orderbook 62 b looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmD Sell Orders forFirmD Guarantee Buy 900 @ 20.00 Guarantee Order 8: Sell 700 @ 20.02Order 5: Guarantee Buy 1200 @ 19.99 Guarantee Order 9: Sell 900 @ 20.03Order 6: Guarantee Buy 2000 @ 19.98 Guarantee Order 10: Sell 1100 @20.04 Order 7:

The internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket B: Bid 400 @ 19.98 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

As incoming Directed Buy Order 26 has the same price and size asDirected Buy Order 25 from the previous example, incoming Directed BuyOrder 26 enters the directed order process at step 300 and continuesthrough step 368 in the same manner as described above for Directed BuyOrder 25. However, at step 374, when the process checks if the directedorder type has any routing restrictions, the results are different. Asan inside limit order does have routing restrictions (i.e., it can onlyroute to away markets at the NBBO), the process continues to step 376and retrieves the price of the best away market offer.

In this example, Away Market A has the best offer. Then, at step 378,the process compares Away Market A's offer price ($20.00) to theDirectedCrossPrice parameter ($20.02). As Away Market A's offer price islower, the process continues to step 380, where the matching rules forinside limit orders are evaluated to determine if incoming Directed BuyOrder 26 can route to Away Market A or not. As Away Market A is at theNBO, incoming Directed Buy Order 26 can indeed route to it. However,inside limit orders can only execute at the NBBO (or better) bydefinition in this embodiment. Accordingly, incoming Buy Order 26 cannotexecute against Guarantee Sell Order 8 at the DirectedCrossPriceparameter ($20.02), as that price is inferior to the NBO ($20.00). Suchan execution would not cause a trade-through violation, but it wouldviolate the rules of the underlying inside limit order type.

As incoming Directed Buy Order 26 cannot execute against Guarantee SellOrder 8, the process continues to step 386, where it automaticallyconverts incoming Directed Buy Order 26 to a non-directed order andpasses it to the regular continuous order matching process. The directedorder process is terminated, and incoming Buy Order 26 is processed as aregular inside limit order. Accordingly, it routes 300 shares to AwayMarket A at $20.00, reprices itself to $20.00, and posts its remaining900 shares at $20.00, locking the market.

It should be noted that incoming Buy Order 26, a directed inside limitorder, would execute in the same manner in this example if it were adirected inside market order instead, except that after routing to AwayMarket A, an inside market order would neither be repriced nor posted.Both order types can only execute at the NBBO. The difference betweenthe two order types in this embodiment is that a directed inside limitorder has a limit price cap that causes it to post (and reprice, ifnecessary) when it is no longer marketable, whereas a directed insidemarket order continues to execute at the NBBO until it is finallyexhausted.

EXAMPLE 10 Directed IOC Buy Order Matches Book Orders Off the NBO andParticipates in the Directed Cross

This example is similar to the preceding example, except that the ordersending firm sends a directed IOC buy order instead of a directed insidelimit buy order. This example illustrates what happens if issue XYZ hasa 3-cent trade through exemption in effect for IOC orders andexchange-restricted orders. Accordingly, an incoming directed IOC buyorder would be allowed to cross a guarantee order if its price is notmore than 3 cents worse than the NBO.

Order Sending Firm D 26 b sends the following directed IOC order toMarket Maker Firm A 31 a:

-   -   →Order 27: Buy 1200 @ 20.02, IOC, Directed Order for FirmA

In this example, the guarantee order book 62 b and the internal book arethe same as at the start of the previous examples. The guarantee orderbook 62 b looks like this:

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmD Orders forFirmD Guarantee Order 5: Guarantee Order 8: Buy 900 @ 20.00 Sell 700 @20.02 Guarantee Order 6: Guarantee Order 9: Buy 1200 @ 19.99 Sell 900 @20.03 Guarantee Order 7: Guarantee Order 10: Buy 2000 @ 19.98 Sell 1100@ 20.04

The internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Away Market A: Buy 200 @ 19.99 Offer 300 @ 20.00Away Market A: Book Order 147: Bid 300 @ 19.99 Sell 100 @ 20.01 AwayMarket B: Book Order 153: Bid 400 @ 19.98 Sell 200 @ 20.02 Book Order145: Away Market B: Buy 100 @ 19.97 Offer 200 @ 20.02 Away Market C:Away Market C: Bid 500 @ 19.97 Offer 400 @ 20.02 Book Order 141: BookOrder 143: Buy 200 @ 19.96 Sell 100 @ 20.03 Book Order 151: Book Order144: Buy 600 @ 19.96 Sell 700 @ 20.03

Incoming Directed IOC Buy Order 27 enters the directed order process atstep 300 and continues through step 378 as described for Directed InsideLimit Buy Order 26 in the previous example. At step 380, the processingfor this example diverges from the previous example. Whereas DirectedInside Limit Buy Order 26 was unable to match Guaranteed Sell Order 8 inExample 9 because the DirectedCrossPrice parameter was not at the NBO,Directed IOC Buy Order 27 is allowed to match. This is because thisissue allows IOC orders to trade through the NBO by up to 3 cents. Asthe DirectedCrossPrice parameter ($20.02) is two cents off the NBO($20.00), the directed cross can execute in this example. Accordingly,the process continues to step 382, where the “Generate Matched SellInstruction” routine 46 a is invoked and proceeds to step 530 in FIG.9A.

At step 532, the size of incoming Directed Buy Order 27 (1200 shares) iscompared to the size of Guarantee Sell Order 8 (700 shares). As the sizeof incoming Directed Buy Order 27 is greater, at step 538, the processpulls (removes) Guarantee Sell Order 8 from the guarantee order book 62b. As Guarantee Sell Order 8 is not a reserve order, the processcontinues to step 542 where it sets the MaxCrossQuantity parameter to700 shares, the size of Guarantee Sell Order 8. The updated guaranteeorder book 62 b looks like this after Guarantee Sell Order 8 is pulled:

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmD Orders forFirmD Guarantee Order 5: Guarantee Order 9: Buy 900 @ 20.00 Sell 900 @20.03 Guarantee Order 6: Guarantee Order 10: Buy 1200 @ 19.99 Sell 1100@ 20.04 Guarantee Order 7: Buy 2000 @ 19.98

At step 546, the process creates a logical link pairing incomingDirected Buy Order 27 and pulled Guarantee Sell Order 8. It does this byappending a ‘match instruction’ to incoming Directed Buy Order 27. Thematch instruction includes information required for the pending directedcross, such as an identifier for Guarantee Sell Order 8, theMaxCrossQuantity parameter and the DirectedCrossPrice parameter. This isdone to ensure that incoming Directed Buy Order 27 recognizes GuaranteeSell Order 8 as the contra side of its directed cross when it encountersGuarantee Sell Order 8 in the internal book's ranked list of offers. Thedirected cross order instruction looks like this:

Then, at step 548, the process momentarily ranks pulled Guarantee SellOrder 8 in the internal book according to price/time priority of theDirectedCrossPrice parameter. The updated internal book momentarilylooks like this:

From this point onward, steps 550 through step 568 are processed forDirected IOC Buy Order 27 exactly as they were for Directed Sweep LimitBuy Order 25 in Example 8. However, at step 570, the processing changes.Whereas sweep limit orders are eligible to route, IOC orders can neverroute by definition. Therefore, in step 570, the process continues tostep 578 (instead of routing to Away Market A's offer in steps 572 and574), where it retrieves the next best offer, posted Sell Order 147.

The process returns to step 566, where it checks if this next best offeris paired Guarantee Sell Order 8. As it is not in this example, theprocess continues to step 568, where it checks if the retrieved offer isa regular book sell order. Sell Order 147 is a regular book order. Theprocess, therefore, continues to step 580, where the process matches 100shares of incoming Directed Buy Order 27 with posted Sell Order 147 at$20.01, the sell order's price. Posted Sell Order 147 is completelyfilled and is removed from the internal book. The updated internal bookmomentarily looks like this:

At step 576, the process checks if incoming Directed Buy Order 27 stillhas shares available to trade. As it has 1100 shares remaining, at step578, the process retrieves the next best offer, which is posted SellOrder 153 in this example.

The process then returns to step 566, where it checks if this next bestoffer is paired Guarantee Sell Order 8. It is not. Therefore, theprocess continues to step 568, where it checks if the retrieved offer isa regular book sell order. Sell Order 153 is a regular book order. Theprocess, therefore, continues to step 580, where it matches 200 sharesof incoming Directed Buy Order 27 with posted Sell Order 153 at $20.02,the Sell order's price. Posted Sell Order 153 is completely filled andis removed from the internal book. The updated internal book momentarilylooks like this:

At step 576, the process checks if incoming Directed Buy Order 27 stillhas shares available to trade. In this example, it has 900 sharesremaining. Therefore, at step 578, the process retrieves the next bestoffer in the internal book.

The next best Offer is Guarantee Sell Order 8. The process returns tostep 566 where it checks if this next best offer is paired GuaranteeSell Order 8. As it is in this example, the process continues to step564, where it crosses 700 shares of incoming Directed Buy Order 27, theMaxCrossQuantity parameter, with pulled Guarantee Sell Order 8 at$20.02, the DirectedCrossPrice parameter. The updated internal booklooks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Away Market B: Offer 200 @ 20.02 AwayMarket B: Bid 400 @ 19.98 Away Market C: Offer 400 @ 20.02 Book Order145: Buy 100 @ 19.97 Book Order 143: Sell 100 @ 20.03 Away Market C: Bid500 @ 19.97 Book Order 144: Sell 700 @ 20.03 Book Order 141: Buy 200 @19.96 Book Order 151: Buy 600 @ 19.96

At step 582, the process checks if pulled Guarantee Sell Order 8 isfully traded. As it is, the process continues to step 586, where itchecks if incoming Directed Buy Order 27 still has any quantityremaining. As incoming Directed Buy Order 27 still has 200 shares, theprocess continues to step 588, where it automatically converts theremaining portion of incoming Directed Buy Order 27 to a non-directedbuy order. As there are no more book orders to match and non-directedIOC Buy Order 27 cannot route, the process cancels the remainder of theorder. The process is terminated as indicated at step 590.

It should be noted that incoming Buy Order 27, a directed IOC order,would execute in the same manner in this example if it were a directedexchange-restricted order instead. Neither order type can route off theposting market center, but both order types can execute with orderspriced up to 3 cents off the NBO in this issue. The difference betweenthe two order types is that an IOC order is always canceled when it canno longer execute, whereas an exchange-restricted order is posted unlessit would lock or cross the market.

EXAMPLE 11 Directed Exchange-Restricted Sell Order Matches posted BuyOrders and Participates in the Directed Cross

In the previous examples, Firm D 26 b directed buy orders to Firm A 31a. In the examples that follow, Firm C 26 a is directing sell orders toFirm A 31 a. The DMM/OSF permissions table 60 is the same as in theprevious examples.

Order Sending Firm C 26 a sends the following directed order to MarketMaker Firm A 31 a:

-   -   →Order 28: Sell 900 @ 19.99, Exchange-Restricted, Directed Order        for FirmA

The incoming directed sell order enters the directed order process atstep 300. At step 302, the process sets the OSF parameter to “FirmC”,the identifier of the order sending firm. At step 304, the processretrieves the DMM/OSF permissions table data. At step 306, the processchecks if the incoming order explicitly specifies a Designated MarketMaker. As it does in this example, at step 308, the process sets the DMMparameter to “FirmA”, the identifier specified on the order. Then, atstep 310, the process checks the DMM/OSF permissions table 60 todetermine if Firm C is permissioned to direct orders to Firm A.

As Firm C is permissioned to direct orders to Firm A in this example,the process continues to step 320 where the order type (e.g., buy orsell) of the incoming order is determined. As the incoming order is asell order, at step 326, the process invokes the “Determine if DirectedSell Order Can Trade” routine 42 b, which directs the process to step450 (FIG. 6B),

At step 452, the process retrieves the guarantee order book 62 a thatFirm A created for crossing with Firm C. As explained above, theguarantee order book 62 a that Firm A created for crossing with Firm Cis different than the guarantee order book 62 b that Firm A created forcrossing with Firm D.

-   -   →The NBBO is 19.99 to 20.00 (500×300).

The guarantee order book 62 a for Firm C looks like this:

FirmA Guarantee FirmA Guarantee Buy Orders for FirmC Sell Orders forFirmC Guarantee Order 1: Buy 1000 @ Guarantee Sell 900 @ 20.00 19.99(Bid) Order 3: (Offer) Reserve Size = 4000 Reserve Size = 3100 GuaranteeOrder 2: Buy 300 @ 15.00 Guarantee Sell 500 @ 30.00 Order 4:

At step 454, the process retrieves the best guarantee buy order from theguarantee order book 62 a, which is Order 1. At step 456, the processretrieves the NBBO ($19.99 to $20.00). Then at step 458, the processchecks if Guarantee Buy Order 1's price ($19.99) is higher than the NBB($19.99). As the prices are equal in this example, the process continuesto step 464, where it sets the DirectedCrossPrice parameter equal to$19.99, which is Guarantee Buy Order 1's price.

Then at step 466, the process compares the price of the incomingDirected Sell Order 28 ($19.99) to the DirectedCrossPrice parameter($19.99). As the prices are equal, the process continues to step 468,where the process compares the DirectedCrossPrice parameter ($19.99) tothe NBO ($20.00). As the DirectedCrossPrice parameter is lower than theNBO, the directed cross can execute at this price without being adjustedbecause it will not trade through the best offer.

The process then continues to step 474, where it checks the order typefor the incoming directed order. As the directed order in this exampleis an exchange-restricted order, it cannot be routed off the postingmarket center, and therefore has routing restrictions. The process, as aresult, continues to step 476, where it retrieves the best away marketbid price. As shown in the internal book below, the best away market bidprice is Away Market A's Bid at $19.99. The internal book appears asfollows (the same as at the start of the previous examples):

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket B: Bid 400 @ 19.98 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

At step 478, the best Away Market Bid ($19.99) is compared to theDirectedCrossPrice parameter ($19.99). The prices in this example areequal. This means Guarantee Buy Order 1 is superior to Away Market A'sBid, as guarantee orders have priority over away markets at the sameprice. The process, therefore, continues to step 482, where the processinvokes the “Generate Matched Buy Instruction” routine 46 b, and theprocess continues to step 630 (FIG. 9B).

At step 632, the size of incoming Directed Sell Order 28 (900 shares) iscompared to the size of the Guarantee Buy Order 1 (1000 shares, the ShowSize). As the size of incoming Directed Sell Order 28 is lower, 900shares of Guarantee Buy Order 1 (the quantity required to match theDirected Sell) are pulled from the guarantee order book 62 a at step634, reducing Guarantee Buy Order 1's Show Size to 100 shares. Theupdated guarantee order book 62 a looks like this:

FirmA Guarantee Buy Orders for FirmC FirmA Guarantee Sell Orders forFirmC Guarantee Buy 100 @ Bid, ← Guarantee Sell 900 @ Offer, Order 1:Reserve Size = 4000 Order 3: Reserve Size = 3100 Guarantee Buy 300 @15.00 Guarantee Sell 500 @ 30.00 Order 2: Order 4:

The process continues to step 636, where it sets the MaxCrossQuantityparameter to 900 shares, the size of incoming Directed Sell Order 28. Atstep 646, the process creates a logical link between incoming DirectedSell Order 28 and Guarantee Buy Order 1. The process does this byappending a ‘match instruction’ to incoming Directed Sell Order 28. Thematch instruction includes information required for the pending directedcross, such as an identifier for Guarantee Buy Order 1, theMaxCrossQuantity parameter, and the DirectedCrossPrice parameter. Thisis done to ensure that incoming Directed Sell Order 28 recognizesGuarantee Buy Order 1 as the contra side of its directed cross whenDirected Sell Order 28 encounters Guarantee Buy Order 1 in the internalbook ranked list. The directed cross order instruction looks like this:

At step 648, the process momentarily ranks Guarantee Buy Order 1 in theinternal book according to the price/time priority of theDirectedCrossPrice parameter. As previously described, guarantee ordersare ranked behind all book orders at or better than theDirectedCrossPrice parameter and ahead of all away market quotes equalto the DirectedCrossPrice parameter. The internal book momentarily lookslike this:

At step 650, the process invokes the “Present Directed Sell to InternalBook” routine 48 b, and the process then continues to step 660 (FIG.10B).

At step 662, the process retrieves the best bid in the internal book,which in this example is posted Buy Order 150. At step 666, the processchecks if the best bid is the guarantee buy order. As this bid is notthe guarantee buy order, the process continues to step 668, where theprocess checks to see if this bid is a regular book buy order. BookOrder 150 is a regular buy order. As such, at step 680, the processmatches 200 shares of Directed Sell Order 28 with posted Buy Order 150at $19.99. Posted Buy Order 150 is completely filled and removed fromthe internal book. The internal book momentarily looks like this:

At step 676, the process checks if incoming Directed Sell Order 28 stillhas shares available to trade. As Directed Sell Order 28 has 700 sharesremaining, at step 678, the process retrieves the next best bid in theinternal book. The next best bid is Guarantee Buy Order 1. The processthen returns to step 666, where it determines that this is a guaranteebuy order and that according to the match instructions appended onDirected Sell Order 28, this is the correct order to cross. Therefore,at step 664, the process executes the directed cross. The processcrosses the remaining 700 shares of incoming Directed Sell Order 28 withGuarantee Buy Order 1 at $19.99, the DirectedCrossPrice parameter.

At step 682, the process checks if Guarantee Buy Order 1 is fullytraded. As Guarantee Buy Order 1 still has 200 unmatched shares in thisexample, the process, at step 684 pulls Guarantee Buy Order 1 from theinternal book ranked list and returns the unmatched shares to theguarantee order book 62 a. The process then terminates as indicated atstep 690. The updated guarantee order book 62 a looks like this:

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmC Orders forFirmC Guarantee Buy 200 @ Bid, ← Guarantee Order 3: Sell 900 @ Offer,Order 1: Reserve Size = 4000 Reserve Size = 3100 Guarantee Buy 300 @15.00 Guarantee Order 4: Sell 500 @ 30.00 Order 2:

The updated internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Away Market A: Bid 300 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market B: Bid 400 @ 19.98 Book Order 147: Sell 100 @ 20.01 BookOrder 145: Buy 100 @ 19.97 Book Order 153: Sell 200 @ 20.02 Away MarketC: Bid 500 @ 19.97 Away Market B: Offer 200 @ 20.02 Book Order 141: Buy200 @ 19.96 Away Market C: Offer 400 @ 20.02 Book Order 151: Buy 600 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 144: Sell 700 @ 20.03

If Firm C had sent a different type of directed order to Firm A, theprocessing in this embodiment would be the same as long as the directedsell order price is marketable ($19.99 or lower). In each case, theincoming directed sell order would have matched posted Buy Order 150 andwould then have crossed Guarantee Buy Order 1. For example, if Firm Chad sent any of the following orders instead of Exchange-Restricted SellOrder 28, each order would have traded exactly as Exchange-RestrictedSell Order 28 did:

-   -   →Order 29: Sell 900 @ 19.99, Sweep Limit, Directed Order for        Firm A    -   →Order 29a: Sell 900 @ 19.99, Inside Limit, Directed Order for        Firm A    -   →Order 30: Sell 900 @ Market, Sweep Market, Directed Order for        Firm A    -   →Order 30a: Sell 900 @ Market, Inside Market, Directed Order for        Firm A    -   →Order 31: Sell 900 @ 19.99, IOC, Directed Order for Firm A

EXAMPLE 12 Directed Inside Market Sell Order Crosses Cleanly in a LockedMarket

In this example, Away Market B changes its bid to $20.00, locking AwayMarket A's Offer. The NBBO is $20.00 to $20.00 (400×300). The market islocked. The internal book looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Away Market B: Bid 400 @ 20.00 ← Away Market A: Offer 300 @ 20.00Book Order 150: Buy 200 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket A: Bid 300 @ 19.99 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

When the process detects a new NBB, it must determine if any primary pegguarantee buy orders must be repriced. The order matching engine 21invokes the “New NBB Updates Pegged Guarantee Buy Orders” routine 54 awhich initiates at step 130 (FIG. 4A). At step 132, the processretrieves the NBBO. Then, at step 134, the process checks if the NBBO($20.00 to $20.00) is crossed. As the NBBO is locked but not crossed inthis example, the process continues to step 136, where it retrieves theguarantee order books 62 a-62 d for this issue. As illustrated in FIG.2, in this example, there are four guarantee order books 62 a-62 d forissue XYZ, three of which 62 a, 62 c-62 d include primary peg buy ordersthat are eligible to be repriced by the new NBB.

In an alternate embodiment of the disclosure, the process depicted inFIG. 4A is only invoked on an as needed basis, e.g., not every time theNBB reprices, but rather only when an incoming directed sell order isabout to be paired with the best resting guarantee buy order, and thecurrent prices of the resting guarantee buy orders must be determinedfirst. In this alternate embodiment, only the guarantee order book thatis being evaluated against the incoming directed order is retrieved andupdated. The alternate embodiment is shown and discussed in the examplesthat follow.

In this example, the guarantee order book 62 a allocated by Firm A 31 afor Firm C 26 a is retrieved at step 136. (Although Guarantee Order 1was partially executed in prior Example 11, it is restored to its fulloriginal size in this example.):

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmC Orders forFirmC Guarantee Buy 1000 @ Bid, Guarantee Order 3: Sell 900 @ Offer,Order 1: Reserve Size = 4000 Reserve Size = 3100 Guarantee Buy 300 @15.00 Guarantee Order 4: Sell 500 @ 30.00 Order 2:

Then at step 138, the process checks if there are any primary pegguarantee buy orders in the guarantee order book 62 a. As Order 1 is aprimary peg guarantee buy order, the process continues to step 142,where it retrieves Guarantee Buy Order 1.

At step 144, the process initially sets Guarantee Buy Order 1's priceequal to $20.00, the NBB. At step 146, the process then checks ifGuarantee Buy Order 1 includes a discretionary offset. In this example,it does not. The process, therefore, continues to step 150, where itchecks if Guarantee Buy Order 1 includes a peg offset. It does not, sothe process continues to step 154, where it checks if Guarantee BuyOrder 1 includes a peg limit. As it does not, the process continues tostep 160, where it reinserts Guarantee Buy Order 1 in the guaranteeorder book 62a at its new price/time priority. At step 162, the processchecks if there are any additional primary peg guarantee buy orders inthis guarantee order book 62 a. In this example, the process,determining that there are none, terminates as indicated at step 166.

The NBBO is still $20.00 to $20.00 (400×300), and the market is stilllocked. The guarantee order book 62 a looks like this.

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmC Orders forFirmC Guarantee Buy 1000 @ 20.00 Guarantee Order 3: Sell 900 @ 20.00Order 1: (Peg to Bid) (Peg to Offer) Reserve Size = 4000 Reserve Size =3100 Guarantee Buy 300 @ 15.00 Guarantee Order 4: Sell 500 @ 30.00 Order2:

As illustrated in this example, in this embodiment of the disclosure,although market makers 31 are not allowed to submit orders that locktheir guarantee order books 62, resting primary peg orders maytemporarily follow the NBBO to lock (but not cross) a guarantee orderbook 62.

Order Sending Firm C 26 a sends the following directed order to MarketMaker Firm A 31 a:

-   -   →Order 32: Sell 2000 @ Market, Inside Market, Directed Order for        FirmA

As the directed order process is not suspended when the NBBO is lockedin this embodiment of the disclosure, incoming Directed Sell Order 32enters the directed order process at step 300 (FIG. 5). At step 302, theprocess sets the OSF parameter to “FirmC”, the identifier of the ordersending firm. At step 304, the process retrieves the DMM/OSF permissionstable data. The process then follows the same sequence of validationsteps as in the previous example, from step 306 through step 450.

At step 452, the process retrieves the guarantee order book 62 a thatFirm A has allocated exclusively for crossing with Firm C. At step 454,the process retrieves the best (highest-priced) resting guarantee buyorder, Guarantee Buy Order 1. The guarantee order book 62 a still lookslike this:

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmC Orders forFirmC Guarantee Buy 1000 @ 20.00 Guarantee Order 3: Sell 900 @ 20.00Order 1: (Bid) (Offer) Reserve Size = 3000 Reserve Size = 3100 GuaranteeBuy 300 @ 15.00 Guarantee Order 4: Sell 500 @ 30.00 Order 2:

At step 456, the process retrieves the NBBO ($20.00 to $20.00), and atstep 458, the process checks if resting Guarantee Buy Order 1's price($20.00) is higher than the NBB ($20,00). As the prices are equal inthis example, the process continues to step 464, where it sets theDirectedCrossPrice parameter equal to $20.00, the price of restingGuarantee Buy Order 1.

At step 466, the process compares the price of incoming Directed SellOrder 32 (Market) to the DirectedCrossPrice parameter ($20.00). Asmarket orders are marketable by definition, the process continues tostep 468, where it compares the DirectedCrossPrice parameter ($20,00) tothe NBO ($20.00). As the prices are equal in this example, the processcontinues to step 470, where it checks if it should attempt to adjustthe DirectedCrossPrice parameter or else stop the directed orderprocess. As directed cross prices are adjusted in this embodiment of thedisclosure, the process continues to step 472, where it invokes the“Adjust Directed Cross Price for NBO Trade Through” routine 44 b andproceeds to step 600 in FIG. 8B,

The NBBO is still $20.00 to $20.00 (400×300), and the internal bookstill looks like this:

Internal Matching Internal Matching Engine Ranked Bids Engine RankedOffers Away Market B: Bid 400 @ 20.00 Away Market A: Offer 300 @ 20.00Book Order 150: Buy 200 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket A: Bid 300 @ 19.99 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

At step 602, the process retrieves the best offer in the internal book,which is from Away Market A. At step 604, the process checks if theoffer is a sell order or an away market quote. As it is an away marketquote in this example, the process continues to step 610, where it setsthe DirectedCrossPrice parameter to $20.00, Away Market A's offer price.By way of explanation, as the best offer is an away market quote and nota sell order, the DirectedCrossPrice parameter is not adjusted toimprove the NBO by the Minimum Price Improvement Increment. The processthen continues to step 612, where it checks if the derivedDirectedCrossPrice parameter ($20.00) is lower than incoming DirectedSell Order 32's price (Market). As market orders are always marketableby definition, the process continues to step 614, where it returns backto step 472 in FIG. 6B.

From step 472, the process continues to step 474, where it checks ifincoming Directed Sell Order 32 has any routing restrictions due to itsunderlying order type. As an inside market order can only route to awaymarkets at the NBBO, the process continues to step 476, where itretrieves the best away market bid, which is Away Market B's Bid. Atstep 478, it checks if Away Market B's Bid ($20.00) is less than orequal to the DirectedCrossPrice parameter ($20.00). As the prices areequal in this example, the process continues to step 482, where the“Generate Matched Buy Instruction” routine 46 b is invoked and proceedsto step 630 in FIG. 9B.

At step 632, the size of incoming Directed Sell Order 32 (2000 shares)is compared to the available size of resting Guarantee Buy Order 1 (1000shares, the Show Size). As the size of incoming Directed Sell Order 32is higher, 1000 shares of Guarantee Buy Order 1 are pulled from theguarantee order book 62a as indicated at step 638. At step 640, the ShowSize of Guarantee Buy Order 1 is replenished from its Reserve Size,reducing the Reserve Size to 3000 shares. The updated guarantee orderbook looks like this:

FirmA Guarantee Buy FirmA Guarantee Sell Orders for FirmC Orders forFirmC Guarantee Buy 1000 @ Bid, Guarantee Sell 900 @ Offer, Order 1:Reserve Size = 3000 ← Order 3: Reserve Size = 3100 Guarantee Buy 300 @15.00 Guarantee Sell 500 @ 30.00 Order 2: Order 4:

The process continues to step 642, where it sets the MaxCrossQuantityparameter equal to 1000 shares, the pulled size (Show Size) of GuaranteeBuy Order 1. At step 646, the process creates a logical link pairingincoming Directed Sell Order 32 and resting Guarantee Buy Order 1. Itdoes this by appending a ‘match instruction’ to incoming Directed SellOrder 32. The directed cross order instruction looks like this:

At step 648, the process momentarily ranks Guarantee Buy Order 1 in theinternal book according to the price/time priority of theDirectedCrossPrice parameter. As previously described, guarantee ordersare ranked behind all book orders at or better than theDirectedCrossPrice parameter and ahead of all away market quotes equalto the DirectedCrossPrice parameter. As Away Market B's Bid is notsuperior, Guarantee Buy Order 1 has the highest priority in themarketplace. The internal book momentarily looks like this:

The process continues to step 650, where the “Present Directed Sell toInternal Book” routine 48 b is invoked, and proceeds to step 660 in FIG.10B. At step 662, the process retrieves the best bid in the internalbook, which is Guarantee Buy Order 1. At step 666, it checks if the bestbid is the paired guarantee buy order. As Guarantee Buy Order 1 is thepaired order, the process continues to step 664, where it executes thedirected cross. The process matches 1000 shares of incoming DirectedSell Order 32 (the MaxCrossQuantity parameter) with Guarantee Buy Order1 at $20.00 (the DirectedCrossPrice parameter). As no orders or quotesare superior to Guarantee Buy Order 1, the directed cross executescleanly with no marketplace interaction.

The process continues to step 682, where it checks if Guarantee BuyOrder 1 is fully traded. As it has been folly traded and removed fromthe internal book's ranked list of bids, the process continues to step686, where it checks if incoming Directed Sell Order 32 still has sharesremaining to trade. In this example, incoming Directed Sell Order 32still has 1000 unmatched shares. Therefore, at step 688, the unmatchedshares are automatically converted to non-directed shares and arereceived by the regular continuous order matching process. The directedorder process terminates at step 690. Incoming Sell Order 32 is nolonger a directed order and is subsequently processed as a regular(non-directed) inside market order. Accordingly, 400 shares of SellOrder 32 are routed to Away Market B at $20.00. As inside market ordersin the regular continuous order matching process must clear each pricelevel before proceeding to the next, Sell Order 32 cannot match BookOrder 150 or any other bid until Away Market B moves off the NBB. Theinternal book temporarily appears as follows while Sell Order 32 isqueued waiting for a new NBB:

Sell Order 32 continues to execute against trading interest as itpresents at the NBB, until the order is completely filled.

EXAMPLE 13 Directed Sweep Market Sell Order Trades with SuperiorInterest in a Crossed Market and Then Participates in the Directed Cross

Continuing from the previous example, Away Market B changes its Bid to$20.01, crossing the market. The NBBO is $20.01 to $20.00 (400×300). Themarket is crossed. The internal book looks like this:

Internal Matching Engine Internal Matching Engine Ranked Bids RankedOffers Away Market B: Bid 400 @ 20.01 ← Away Market A: Offer 300 @ 20.00Book Order 150: Buy 200 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket A: Bid 300 @ 19.99 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

As the process detects the new NBB, it invokes the procedures thatupdate pegged guarantee buy orders when the NBB changes. Referring toFIG. 4A, at step 130, the “New NBB Updates Pegged Guarantee Buy Orders”routine 54 a is activated. At step 132, the process retrieves the NBBO.At step 134, the process checks if the NBBO is crossed. As the NBBO iscrossed, the process terminates as indicated at step 140. Guarantee BuyOrder 1, therefore, is not repriced at $20.01, the NBB. Instead, itremains priced at $20.00, its previous price. The directed order processis not suspended in this embodiment when the NBBO is crossed. Peggedguarantee orders, however, are not repriced when the NBBO is crossed.The guarantee order book 62 a for Firm C remains unchanged and continuesto look like this:

FirmA Guarantee Buy Orders FirmA Guarantee Sell Orders for FirmC forFirmC Guarantee Order 1: Buy 1000 Guarantee Order 3: Sell 900 @ 20.00(Bid) @ 20.00 (Offer) Reserve Size = 3000 Reserve Size = 3100 GuaranteeOrder 2: Buy Guarantee Order 4: Sell 300 @ 15.00 500 @ 30.00

Order Sending Firm C 26 a sends the following directed order to MarketMaker Firm A 31 a:

-   -   →Order 33: Sell 2000 @ Market, Sweep Market, Directed Order for        FirmA

According to rules for this embodiment of the disclosure, the directedorder process is not suspended when the NBBO is crossed. Accordingly,incoming Directed Sell Order 33 enters the directed order process atstep 300. At step 302, the process sets the OSF parameter to “FirmC”,the identifier, of the order sending firm. At step 304, the processretrieves the DMM/OSF permissions table data. The process follows thesame sequence of validation steps as in the previous example, from steps306 through step 450.

At step 452, the process retrieves the guarantee order book 62 a thatFirm A allocated for crossing with Firm C. The guarantee order book 62 alooks like this:

FirmA Guarantee Buy Orders FirmA Guarantee Sell Orders for FirmC forFirmC Guarantee Order 1: Buy 1000 Guarantee Order 3: Sell 900 @ 20.00(Bid) @ 20.00 (Offer) Reserve Size = 3000 Reserve Size = 3100 GuaranteeOrder 2: Buy Guarantee Order 4: Sell 300 @ 15.00 500 @ 30.00

At step 454, the process retrieves the best resting guarantee buy order,Guarantee Buy Order 1. At step 456, the process retrieves the NBBO($20.01 to $20.00). At step 458, the process checks if resting GuaranteeBuy Order 1's price ($20.00) is higher than the NBB ($20.01). As itsprice is lower in this example, the process continues to step 464, whereit sets the DirectedCrossPrice parameter equal to $20.00, the price ofGuarantee Buy Order 1.

At step 466, the process compares the price of incoming Directed SellOrder 33 (Market) to the DirectedCrossPrice parameter ($20.00). As theprices are marketable by definition, the process continues to step 468,where it compares the DirectedCrossPrice parameter ($20.00) to the NBOprice ($20.00). As the prices are equal in this example, the processcontinues to step 470, where it checks if it should attempt to adjustthe directed cross price or else stop the directed order process. Asdirected cross prices are adjusted in this embodiment of the disclosure,the process continues to step 472, where the “Adjust Directed CrossPrice for NBO Trade Through” routine 44 b and proceeds to step 600 inFIG. 8B. The NBBO is still $20.01 to $20.00 (400×300). The market isstill crossed, and the internal book still looks like this:

Internal Matching Engine Internal Matching Engine Ranked Bids RankedOffers Away Market B: Bid 400 @ 20.01 Away Market A: Offer 300 @ 20.00Book Order 150: Buy 200 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket A: Bid 300 @ 19.99 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

At step 602, the process retrieves the best offer in the internal book,which is on Away Market A. At step 604, the process checks if the offeris a sell order or an away market quote. As it is an away market quotein this example, the process continues to step 610, where it sets theDirectedCrossPrice parameter to $20.00, Away Market A's Offer price. Theprocess then continues to step 612, where it checks if the derivedDirectedCrossPrice parameter ($20.00) is lower than incoming DirectedSell Order 33's price (Market). As Market Orders are always marketableby definition, the process continues to step 614, where it returns tostep 472 in FIG. 6B.

From step 472, the process continues to step 474, where it checks ifincoming Directed Sell Order 33 has any routing restrictions due to itsunderlying order type. As a sweep market order has no routingrestrictions, the process continues to step 482, where the “GenerateMatched Buy Instruction” routine 46 b is invoked and proceeds to step630 in FIG. 9B.

Then at step 632, the size of incoming Directed Sell Order 33 (2000shares) is compared to the size of the Guarantee Buy Order 1 (1000shares, the Show Size). As the size of incoming Directed Sell Order 33is higher, 1000 shares of Guarantee Buy Order 1 are pulled from theguarantee order book 62 a at step 638. At step 640, the Show Size isreplenished from the Reserve Size, reducing the Reserve Size to 2000shares. The updated guarantee order book 62 a looks like this:

FirmA Guarantee Buy Orders FirmA Guarantee Sell Orders for FirmC forFirmC Guarantee Order 1: Buy 1000 @ Bid, Guarantee Order 3: Sell 900 @Offer, Reserve Size = 2000 ← Reserve Size = 3100 Guarantee Order 2: Buy300 @ 15.00 Guarantee Order 4: Sell 500 @ 30.00

The process then continues to step 642, where it sets theMaxCrossQuantity parameter equal to 1000 shares, the pulled size (ShowSize) of Guarantee Buy Order 1. At step 646, the process then creates alogical link pairing incoming Directed Sell Order 33 and Guarantee BuyOrder 1. It does this by appending a ‘match instruction’ to incomingDirected Sell Order 33. The directed cross order instruction looks likethis:

At step 648, the process momentarily ranks Guarantee Buy Order 1 in theinternal book according to the price/time priority of theDirectedCrossPrice parameter. As previously described, guarantee ordersare ranked behind all book orders at or better than theDirectedCrossPrice parameter and ahead of all away market quotes equalto the DirectedCrossPrice parameter, Guarantee Buy Order 1 has thesecond highest priority in the marketplace, as Away Market B has pricepriority. The internal book momentarily looks like this:

The process continues to step 650, where the “Present Directed Sell toInternal Book” routine 48 b is invoked and proceeds to step 660 in FIG.10B. At step 662, the process retrieves the best bid in the internalbook, which is Away Market B's Bid. At step 666, the process checks ifthis bid is the guarantee buy order. As this bid is not the guaranteebuy order in this example, the process continues to step 668, where theprocess checks to see if this bid is a regular (book) buy order. As thisbid is not a book order, the process continues to step 670, where itchecks if incoming Directed Sell Order 33 can be routed. As sweep marketorders can be routed, the process continues to step 672, where it checksif Away Market B's Bid is already locked down. As the posting marketcenter has not previously routed any shares to Away Market B's currentbid, the quote is not locked down and is eligible to receive the fullbid size. Then, at step 674, the process routes 400 shares of incomingDirected Sell Order 33 to Away Market B at $20.01. The internal bookmomentarily looks like this:

Without waiting for a response from Away Market B, the process proceedsto step 676 and determines that incoming Directed Sell Order 33 stillhas 1600 shares available to trade. Therefore, the process proceeds tostep 678 where it retrieves the next best bid in the internal book,which is Guarantee Buy Order 1.

The process then returns to step 666 where the process checks if this isthe paired guarantee buy order. As Guarantee Buy Order 1 is the pairedGuarantee Order, the process continues to step 664, where it executesthe directed cross. The process matches 1000 shares of incoming DirectedSell Order 33 (the MaxCrossQuantity parameter) with Guarantee Buy Order1 at $20.00 (the DirectedCrossPrice parameter). The internal bookmomentarily looks like this:

Internal Matching Engine Internal Matching Engine Ranked Bids RankedOffers Away Market B: Bid 400 @ 20.01 Away Market A: Offer 300 @ 20.00 →Locked Down Quantity = 400 Book Order 150: Buy 200 @ 19.99 Book Order147: Sell 100 @ 20.01 Away Market A: Bid 300 @ 19.99 Book Order 153:Sell 200 @ 20.02 Book Order 145: Buy 100 @ 19.97 Away Market B: Offer200 @ 20.02 Away Market C: Bid 500 @ 19.97 Away Market C: Offer 400 @20.02 Book Order 141: Buy 200 @ 19.96 Book Order 143: Sell 100 @ 20.03Book Order 151: Buy 600 @ 19.96 Book Order 144: Sell 700 @ 20.03

The process continues to step 682, where it checks if Guarantee BuyOrder 1 is fully traded. As Guarantee Buy Order 1 has been fully tradedand removed from the internal book's ranked list of bids, the processcontinues to step 686, where it checks if incoming Directed Sell Order33 still has shares remaining to trade. Incoming Directed Sell Order 33still has 600 unmatched shares. As such, at step 688, the unmatchedshares are automatically converted to non-directed shares and arereceived by the regular continuous order matching process. The directedorder process terminates as indicated at step 690. Incoming Sell Order33 is no longer a directed order and is subsequently treated as aregular sweep market order. As sweep market orders can contemporaneouslyexecute against all trading interest in the marketplace, incoming SellOrder 33 matches 200 shares of posted Buy Order 150 at $19.99, routes300 shares to Away Market A at $19.99 and matches 100 shares of postedBuy Order 145 at $19.97. The posted buy orders are completely depletedand are removed from the book. The updated internal book appears asfollows:

Internal Matching Engine Internal Matching Engine Ranked Bids RankedOffers Away Market B: Bid 400 @ 20.01 Away Market A: Offer 300 @ 20.00Locked Down Quantity = 400 Away Market A: Bid 300 @ 19.99 Book Order147: Sell 100 @ 20.01 → Locked Down Quantity = 300 Away Market C: Bid500 @ 19.97 Book Order 153: Sell 200 @ 20.02 Book Order 141: Buy 200 @19.96 Away Market B: Offer 200 @ 20.02 Book Order 151: Buy 600 @ 19.96Away Market C: Offer 400 @ 20.02 Book Order 143: Sell 100 @ 20.03 BookOrder 144: Sell 700 @ 20.03

Away Market B and Away Market A fill the orders routed to them and movetheir quotes. The continuous order matching process unlocks their bids.

EXAMPLE 14 Guarantee Sell Order Price Locks Best Bid in the Marketplace;Directed Cross Price must be Adjusted to Avoid Trading Through theInternal Book

In this example, a different order sending firm, Firm B 26 c, directs anorder to its own Market Maker 31 b. Firm B has been configured in theDMM/OSF permissions table 60 so that whenever it sends a directed orderbut does not explicitly specify a DMM, the order defaults to its ownmarket maker.

-   -   →Order 35: Buy 600 @ Market, Sweep Market, Directed Order

The incoming directed buy order enters the directed order process atstep 300. At step 302, the process sets the OSF parameter to “FirmB”,the identifier of the order sending firm. At step 304, the processretrieves the DMM/OSF permissions table data, and at step 306, theprocess checks if incoming Directed Buy Order 35 explicitly specifies aDesignated Market Maker. As it does not, at step 316, the process checksif a default DMM exists in the DMM/OSF permissions table 60. As adefault does exist, at step 318, the process sets the DMM parameter to“FirmB”.

As Firm B is permissioned to direct orders to Firm B (itself), theprocess continues to step 320 where the side of the incoming order ischecked. As incoming Directed Buy Order 35 is a buy order, at step 322the process invokes the “Determine if Directed Buy Order Can Trade”routine 42 a and proceeds to step 350 (FIG. 6A).

Then, at step 352, the process retrieves the guarantee order book 62 cthat Firm B has created for crossing with incoming orders from the samefirm. The guarantee order book 62 c looks like this:

FirmB Guarantee Buy Orders FirmB Guarantee Sell Orders for FirmB forFirmB Guarantee Order 11: Buy Guarantee Order 13: Sell 600 600 @ Bid @Offer, Discretion = −.01 Guarantee Order 12: Buy 1000 @ Bid, GuaranteeOrder 14: Sell Peg Offset = −.01 900 @ Offer

By way of explanation regarding Guarantee Sell Order 13, in thisexample, the posting market center's business rules allow guaranteeorders to grant price improvement, i.e., to execute at prices betterthan the NBBO. This is why Guarantee Sell Order 13 was allowed toinclude a discretionary offset, which always improves the current orderprice of a guarantee order. Accordingly, if guarantee orders are notallowed to grant price improvement, then guarantee orders are notallowed to include a discretionary offset.

Regardless of whether guarantee orders are allowed to unconditionallygrant price improvement or not, there are cases where a guarantee ordermust receive price improvement, i.e., must execute at a better price, toprevent a trade-through. This is illustrated in the example thatfollows.

In this example, the NBBO is $19.99 to $20.00 (500×300). Accordingly,the primary peg orders in the guarantee order book 62 c are currentlypriced as follows:

FirmB Guarantee Buy Orders FirmB Guarantee Sell Orders for FirmB forFirmB Guarantee Order 11: Buy 600 @ 19.99 Guarantee Order 13: Sell 600(Bid) @ 19.99 (Offer − .01) Guarantee Order 12: Buy 1000 @ 19.98Guarantee Order 14: Sell 900 (Bid − .01) @ 20.00 (Offer)

As illustrated in this example, in this embodiment of the disclosure,although primary peg orders are not allowed to be submitted at limitprices that would result in a locked guarantee order book, restingprimary peg guarantee orders are allowed to follow the NBBO to pricesthat temporarily lock (but not cross) the guarantee order book. In thisexample, even though the NBBO is not locked, the guarantee order book 62c is momentarily locked because the spread is tight and Guarantee SellOrder B's price ($19.99) is pegged to be superior to the NBO ($20.00).

At step 354, the process retrieves the best guarantee sell order, Order13 in this example. At step 356, the process retrieves the NBBO ($19.99to $20.00). At step 358, the process checks if Guarantee Sell Order 13'sprice ($19.99) is lower than the NBO ($20.00). In this example, it islower, so the process continues to step 360, where it checks ifguarantee sell orders are allowed to execute at prices that are lowerthan the NBO. In this example, the posting market center's businessrules allow guarantee sell orders to execute at prices superior to theNBO, so the process continues to step 364, where it sets theDirectedCrossPrice parameter equal to $19.99, which is Guarantee SellOrder 13's price.

Next, at step 366, the process compares the price of incoming DirectedBuy Order 35 (Market) to the DirectedCrossPrice parameter ($19.99). Asthe prices are marketable by definition, the process continues to step368, where it compares the DirectedCrossPrice ($19.99) to the NBB price($19.99). Because the spread is so tight, Guarantee Sell Order 13'sprice is the same as the NBB price. As the directed cross price maypotentially trade through the NBB, the process continues to step 370,where it checks if the directed cross price should be adjusted or if thedirected order process should be stopped instead. As prices are adjustedin this embodiment of the disclosure, the process continues to step 372,where the “Adjust Directed Cross Price for NBB Trade Through” routine 44a is invoked, and the process proceeds to step 500 in FIG. 8A. Theinternal book looks like this:

Internal Matching Engine Internal Matching Engine Ranked Bids RankedOffers Book Order 150: Buy 200 @ 19.99 Away Market A: Offer 300 @ 20.00Away Market A: Bid 300 @ 19.99 Book Order 147: Sell 100 @ 20.01 AwayMarket B: Bid 400 @ 19.98 Book Order 153: Sell 200 @ 20.02 Book Order145: Buy 100 @ 19.97 Away Market B: Offer 200 @ 20.02 Away Market C: Bid500 @ 19.97 Away Market C: Offer 400 @ 20.02 Book Order 141: Buy 200 @19.96 Book Order 143: Sell 100 @ 20.03 Book Order 151: Buy 600 @ 19.96Book Order 144: Sell 700 @ 20.03

At step 502, the process retrieves the best bid from the internal book'sranked list of bids, which is posted Buy Order 150 in this example. Atstep 504, the process checks if the best bid is a buy order or an awaymarket quote. As Buy Order 150 is a buy order, the process continues tostep 506, where the process retrieves the Minimum Price ImprovementIncrement. In this example, the Minimum Price Improvement Increment isset to a penny. Therefore, at step 508, the process derives theDirectedCrossPrice parameter by adding the Minimum Price ImprovementIncrement (0.01) to posted Buy Order 150's price ($19.99) to derive theDirectedCrossPrice parameter of $20.00. By way of explanation, thereason that incoming Directed Buy Order 35 and resting Guarantee SellOrder 13 cannot cross at $19.99 is because it would result in a tradethrough of posted Buy Order 150. Posted Buy Order 15 has time priorityat the price of $19.99. However, posted Buy Order 150 cannot be executedbecause Guarantee Sell Order 13 cannot match it. By definition,guarantee orders cannot interact with the marketplace, they can onlymatch the directed order with which they are paired for crossing.

The process continues to step 512, where it compares theDirectedCrossPrice parameter ($20.00) to incoming Directed Buy Order35's price (Market). As the DirectedCrossPrice parameter is not higherin this example, the process continues to step 514, where it returns tostep 372 in FIG. 6A.

From step 372, the process continues to step 374, where it checks ifincoming Directed Buy Order 35 has any routing restrictions. As sweepmarket orders do not have routing restrictions, the process continues tostep 382, where the “Generate Matched Sell Instruction” routine 46 a isinvoked, and the process continues to step 530 in FIG. 9A.

From step 530, the process at step 532 compares the size of incomingDirected Buy Order 35 (600 shares) to the size of resting Guarantee SellOrder 13 (600 shares). As the sizes are equal, the process, at step 538,pulls Guarantee Sell Order 13 from the guarantee order book 62 c. Theupdated guarantee order book 62 c looks like this:

FirmB Guarantee Buy Orders FirmB Guarantee Sell Orders for FirmB forFirmB Guarantee Order 11: Buy 600 @ Bid Guarantee Order 14: Sell 900 @Offer Guarantee Order 12: Buy 1000 @ Bid, Peg Offset = −.01

The process determines that Guarantee Sell Order 13 is not a reserveorder at step 540 and continues to step 542, where it sets theMaxCrossQuantity parameter to 600 shares, which is the size of GuaranteeSell Order 13.

At step 546, the process creates a logical link between incomingDirected Buy Order 35 and resting Guarantee Sell Order 13. It does thisby appending a ‘match instruction’ to incoming Directed Buy Order 35.The directed cross order instruction looks like this:

At step 548, the process momentarily ranks Guarantee Sell Order 13 inthe internal book—but it ranks it according to the adjustedDirectedCrossPrice parameter ($20.00), not according to Guarantee SellOrder 13's original unadjusted price ($19.99). By way of explanation,the reason that the pulled guarantee order's price is not alsopermanently adjusted is because any portion of a guarantee order thatdoes not trade is returned to the guarantee order book. The adjustedprice is only in effect for the pending directed cross transaction.

Guarantee Sell Order 13 is ranked in the internal book according to theprice/time priority rules for guarantee orders, i.e., behind all bookorders at or better than the DirectedCrossPrice parameter and ahead ofall away market quotes equal to the DirectedCrossPrice parameter. As nooffers are superior, Guarantee Sell Order 13 is ranked first in theinternal book. The Directed Buy and the Guarantee Sell will be able tocross cleanly without any interaction with the marketplace. The internalbook momentarily looks like this:

The process continues to step 550, where the “Present Directed Buy toInternal Book” routine 48 a is invoked, and the process proceeds to step560 in FIG. 10A.

From step 560, at step 562, the process retrieves the best offer in theinternal book, which is Guarantee Sell Order 13. At step 566, theprocess determines that this is the paired guarantee sell order.Therefore, at step 564, the process executes the directed cross. Theprocess crosses 600 shares of incoming Directed Buy Order 35 (theMaxCrossQuantity parameter) with Guarantee Sell Order 13 at the price of$20.00 (the DirectedCrossPrice parameter).

Then, at step 582, the process checks if Guarantee Sell Order 13 isfully traded. As the Guarantee Order has no unexecuted shares, theprocess proceeds to step 586, where it checks if incoming Directed BuyOrder 35 has any unexecuted shares. As incoming Directed Buy Order 35 isalso folly traded, the process terminates as indicated at step 590.

Detailed Examples of the Automatic Repricing of Pegged Guarantee Orders

The examples in this section illustrate how primary peg guarantee ordersare updated as the NBBO changes. As discussed above, primary pegguarantee orders behave somewhat differently than regular(non-guarantee) primary peg orders. Primary Peg Guarantee Buy OrdersUpdated by NBB Changes

These examples illustrate how primary peg guarantee buy orders areautomatically repriced as the NBB changes. In these examples, the NBBOis $19.99 to $20.02. A permissioned market maker sends the followingprimary peg guarantee buy orders:

-   -   →Guarantee Order 1: Buy @ Bid    -   →Guarantee Order 2: Buy @ Bid, Peg Offset=−0.01    -   →Guarantee Order 3: Buy @ Bid, Discretionary Offset=+0.01    -   →Guarantee Order 4: Buy @ Bid, Peg Offset=−0.02, Peg Limit=19.98    -   →Guarantee Order 5: Buy @ Bid, Discretionary Offset=+0.02, Peg        Limit=20.02

All primary peg buy orders are priced in relation to the NBB (“Bid”),which is presently $19.99. The guarantee order book looks like this whenthe orders are priced and ranked according to price/time priority:

Guarantee Order Book Bids Current Order Price Guarantee Order 5: Buy @Bid + .02, 20.01 Peg Limit = 20.02 Guarantee Order 3: Buy @ Bid + .0120.00 Guarantee Order 1: Buy @ Bid 19.99 Guarantee Order 2: Buy @ Bid −.01 19.98 Guarantee Order 4: Buy @ Bid − .02, 19.97 Peg Limit = 19.98

The NBBO changes to $20.03 to $20.05. Referring to FIG. 4A, at step 132,the new NBBO price is retrieved. At step 134, the process checks to seeif the NBBO is crossed. If the NBBO is crossed, then the pegged ordersare not repriced, and the process terminates as indicated at step 140.

As the NBBO is not crossed in this example, the process continues tostep 136 and retrieves the guarantee order book. Then, at step 138, theprocess determines, in this example, that primary peg guarantee buyorders do reside in the book and continues to step 142.

EXAMPLE 15 Update Guarantee Buy Order 5 (discretion offset+peg limit)

At step 142, the process retrieves the best guarantee buy order, Order5:

-   -   →Guarantee Order 5: Buy @ Bid, Discretionary Offset=+0.02, Peg        Limit=20.02

At step 144, the process initially sets the CurrentOrderPrice parameterof Guarantee Buy Order 5 to $20.03, which is the present NBB. At step146, the process checks if Guarantee Buy Order 5 has a discretionaryoffset. It does in this example, and the process, at step 148, adds thediscretionary offset (0.02) to the CurrentOrderPrice parameter ($20.03)to derive the updated CurrentOrderPrice parameter ($20.05). If updatingthe CurrentOrderPrice would cause the guarantee order book to becomecrossed (i.e., buy higher than sell), then the process does not updatethe CurrentOrderPrice parameter with the discretionary offset.

The process continues to step 150, where it checks if Guarantee BuyOrder 5 has a peg offset. As it does not (a guarantee order can have adiscretionary offset or a peg offset, but not both), the processcontinues to step 154, where it checks if Guarantee Buy Order 5 has apeg limit. It does in this example. As such, the process continues tostep 156, where it compares the CurrentOrderPrice parameter ($20.05) tothe Peg Limit ($20.02). As the CurrentOrderPrice parameter is higherthan the Peg Limit, the process continues to step 158, where it resetsthe CurrentOrderPrice parameter equal to the Peg Limit ($20.02). At-step160, the process reinserts Guarantee Buy Order 5 in the guarantee orderbook in price/time priority according to its CurrentOrderPriceparameter.

Then at step 162, the process checks if additional pegged buy ordersexist and, in this example, finding this to be true, proceeds to step164 where it retrieves the next buy order, Guarantee Buy Order 3.

EXAMPLE 16 Update Guarantee Buy Order 3 (Discretion Offset)

Retrieved Guarantee Buy Order 3 looks like this:

-   -   →Guarantee Order 3: Buy @ Bid, Discretionary Offset=+0.01

The process returns to step 144, where it initially sets theCurrentOrderPrice parameter of Guarantee Order 3 to $20.03, the NBB. Atstep 146, the process checks if Guarantee Buy Order 3 has adiscretionary offset. It does in this example, so the process continuesto step 148, where it adds the discretionary offset (+0.01) to theCurrentOrderPrice parameter ($20.03) to derive the updatedCurrentOrderPrice parameter ($20.04). If updating the CurrentOrderPriceparameter would cause the guarantee order book to become crossed (i.e.,buy higher than sell), then the process does not update theCurrentOrderPrice parameter with the discretionary offset.

The process then continues to step 150, where it checks if Guarantee BuyOrder 3 has a peg offset. As it does not in this example, the processcontinues to step 154, where it checks if Guarantee Buy Order 3 has apeg limit. It does not in this example. The process, therefore,continues to step 160, where it reinserts Guarantee Buy Order 3 in theguarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 162, the process checks if additional pegged buy orders existand finding this to be true in this example, proceeds to step 164 whereit retrieves the next buy order, which is Guarantee Buy Order 1.

EXAMPLE 17 Update Guarantee Buy Order 1

Retrieved Guarantee Buy Order 1 looks like this:

-   -   →Guarantee Order 1: Buy @ Bid

The process returns to step 144, where it initially sets theCurrentOrderPrice parameter of Guarantee Order 1 to $20.03, the NBB.Then, at step 146, the process checks if Guarantee Buy Order 1 has adiscretionary offset. As it does not in this example, the processcontinues to step 150, where it checks if Guarantee Buy Order 1 has apeg offset. It does not, so the process continues to step 154, where itchecks if Guarantee Buy Order 1 has a peg limit. As it does not in thisexample, the process continues to step 160, where it reinserts GuaranteeBuy Order 1 in the guarantee order book in price/time priority accordingto its CurrentOrderPrice parameter.

At step 162, the process checks if additional pegged guarantee buyorders exist and, in this example, finding this to be true, proceeds tostep 164 where it retrieves the next buy order, which is Guarantee BuyOrder 2.

EXAMPLE 18 Update Guarantee Buy Order 2 (Peg Offset)

Retrieved Guarantee Buy Order 2 looks like this:

-   -   →Guarantee Order 2: Buy @ Bid, Peg Offset=−0.01

The process returns to step 144 again, where it initially sets theCurrentOrderPrice parameter of Guarantee Buy Order 2 to $20.03, the NBB.At step 146, the process checks if Guarantee Buy Order 2 has adiscretionary offset. It does not in this example. Therefore, theprocess continues to step 150. At step 150, the process checks ifGuarantee Buy Order 2 has a peg offset. In this example, it does. Assuch, the process continues to step 152, where it subtracts the pegoffset (−0.01) from the CurrentOrderPrice parameter ($20.03) to derivethe updated CurrentOrderPrice parameter ($20.02).

The process then continues to step 154, where it checks if Guarantee BuyOrder 2 has a peg limit. As it does not in this example, the processcontinues to step 160, where it reinserts Guarantee Buy Order 2 in theguarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 162, the process checks if additional pegged guarantee buyorders exist. In this example, additional pegged guarantee buy orders doexist. Therefore, the process proceeds to step 164 where it retrievesthe last buy order, which is Guarantee Buy Order 4.

EXAMPLE 19 Update Guarantee Buy Order 4 (Peg Offset+Peg Limit)

Retrieved Guarantee Buy Order 4 looks like this:

-   -   →Guarantee Order 4: Buy @ Bid, Peg Offset=−0.02, Peg Limit=19.98

The process returns to step 144, where it initially sets theCurrentOrderPrice parameter of Guarantee Buy Order 4 to $20.03, the NBB.At step 146, the process checks if Guarantee Buy Order 4 has adiscretionary offset. It does not in this example, and the processcontinues to step 150. At step 150, the process checks if Guarantee BuyOrder 4 has a peg offset. It does in this example. Therefore, theprocess continues to step 152, where it subtracts the offset (−0.02)from the CurrentOrderPrice parameter ($20.03) to derive the updatedCurrentOrderPrice parameter ($20.01).

The process then continues to step 154, where it checks if Guarantee BuyOrder 4 has a peg limit. As it does in this example, the processcontinues to step 156, where it compares the CurrentOrderPrice parameter($20.01) to the Peg Limit ($19.98). As the CurrentOrderPrice parameteris higher than the Peg Limit, the process continues to step 158, whereit resets the CurrentOrderPrice parameter equal to $19.98, which is thePeg Limit. Then at step 160, the process reinserts Guarantee Buy Order 4in the guarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 162, the process checks if additional pegged guarantee buyorders exist, and finding none, continues to step 166 where the processis terminated. With the NBB at $20.03, the updated guarantee order booklooks like this when ranked in price/time priority:

Guarantee Order Book Bids Current Order Price Guarantee Order 3: Buy @Bid + .01 20.04 Guarantee Order 1: Buy @ Bid 20.03 Guarantee Order 5:Buy @ Bid + .02, 20.02 Peg Limit = 20.02 Guarantee Order 2: Buy @ Bid −.01 20.02 Guarantee Order 4: Buy @ Bid − .02, 19.98 Peg Limit = 19.98

It should be noted that Guarantee Buy Order 5 and Guarantee Buy Order 2currently have the same price ($20.02) because the Peg Limit onGuarantee Buy Order 5 imposed a ceiling price. Even if multiple ordersat the same limit price cannot be submitted according to the rules inthis embodiment of the disclosure, multiple orders are permitted tomomentarily be repriced at the same price as the NBBO fluctuates. AsGuarantee Buy Order 5 was priced at $20.02 before Guarantee Buy Order 2was, it has time priority.

Primary Peg Guarantee Sell Orders Updated by NBO Changes

The examples that follow illustrate how primary peg guarantee sellorders are automatically repriced as the NBO changes. For ease ofillustration, the guarantee sell orders in the following examples residein a different guarantee order book than the guarantee buy orders of theprevious example.

In this example, the NBBO is $20.03 to $20.05, and a permissioned marketmaker sends the following primary peg guarantee sell orders:

-   -   →Guarantee Order 6: Sell @ Offer    -   →Guarantee Order 7: Sell @ Offer, Peg Offset=+0.01    -   →Guarantee Order 8: Sell @ Offer, Discretionary Offset=−0.01    -   →Guarantee Order 9: Sell @ Offer, Peg Offset=+0.02, Peg        Limit=20.06    -   →Guarantee Order 10: Sell @ Offer, Discretionary Offset=−0.02,        Peg Limit=20.02

The guarantee order book looks like this when the orders are priced andranked according to price/time priority:

Guarantee Order Book Offers Current Order Price Guarantee Order 10: Sell@ Offer − .02, 20.03 Peg Limit = 20.02 Guarantee Order 8: Sell @ Offer −.01 20.04 Guarantee Order 6: Sell @ Offer 20.05 Guarantee Order 7: Sell@ Offer + .01 20.06 Guarantee Order 9: Sell @ Offer + .02, 20.07 PegLimit = 20.06

The NBBO changes to $20.00 to $20.01. Referring to FIG. 4B, at step 232,the new NBBO price is retrieved, and at step 234, the process checks tosee if the NBBO is crossed. If the NBBO is crossed, then the peggedorders are not repriced, and the process terminates as indicated at step240.

In this example, the NBBO is not crossed. As such, the process continuesto step 236 and retrieves the guarantee order book. At step 238, theprocess determines that primary peg guarantee sell orders reside in thebook and continues to step 242.

EXAMPLE 20 Update Guarantee Sell Order 10 (discretionary offset+peglimit)

At step 242, the process retrieves the best guarantee sell order, whichis Order 10 in this example:

-   -   →Guarantee Order 10: Sell @ Offer, Discretionary Offset=−0.02,        Peg Limit=20.02

Then, at step 244, the process initially sets the CurrentOrderPriceparameter of Guarantee Sell Order 10 to $20.01, which is the presentNBO. At step 246, the process then checks it Guarantee Sell Order 10 hasa discretionary offset. As it does in this example, the processcontinues to step 248, where it subtracts the Discretionary Offset(0.02) from the CurrentOrderPrice parameter ($20.01) to derive theupdated CurrentOrderPrice parameter of $19.99. If updating theCurrentOrderPrice parameter would cause the guarantee order book tobecome crossed (buy higher than sell), then the process does not updatethe CurrentOrderPrice parameter with the discretionary offset.

The process then continues to step 250, where it checks if GuaranteeSell Order 10 has a peg offset. As it does not (as explained above aguarantee order cannot have both a discretionary offset and a pegoffset), the process continues to step 254, where it checks if GuaranteeSell Order 10 has a peg limit. Guarantee Sell Order 10 does have a peglimit. The process, therefore, continues to step 256, where it comparesthe CurrentOrderPrice parameter ($19.99) to the Peg Limit ($20.02). Asthe CurrentOrderPrice parameter is lower than the Peg Limit in thisexample, the process continues to step 258, where it resets theCurrentOrderPrice parameter equal to $20.02, which is the Peg Limit. Atstep 260, the process then reinserts Guarantee Sell Order 10 in theguarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 262, the process checks if additional pegged sell orders exist,and in this example finding this to be true, the process proceeds tostep 264 where it retrieves the next sell order, which is Guarantee SellOrder 8.

EXAMPLE 21 Update Guarantee Sell Order 8 (Discretion Offset)

Retrieved Guarantee Sell Order 8 looks like this:

-   -   →Guarantee Order 8: Sell @ Offer, Discretionary Offset=−0.01

The process returns to step 244, where it initially sets theCurrentOrderPrice parameter of Guarantee Sell Order 8 to $20.01, theNBO. Then, at step 246, it checks if Guarantee Sell Order 8 has adiscretionary offset. As it does in this example, the process continuesto step 248, where it subtracts the Discretionary Offset (−0.01) fromthe CurrentOrderPrice parameter ($20.01) to derive the updatedCurrentOrderPrice parameter ($20.00). If updating the CurrentOrderPriceparameter would cause the guarantee order book to become crossed (i.e.,buy higher than sell), then the process does not update theCurrentOrderPrice parameter with the Discretionary Offset.

The process then continues to step 250, where it checks if GuaranteeSell Order 8 has a Peg Offset. As it does not in this example (aguarantee order cannot have both a discretionary offset and a pegoffset), the process continues to step 254, where it checks if GuaranteeSell Order 8 has a peg limit. As it does not in this example, theprocess continues to step 260, where it reinserts Guarantee Sell Order 8in the guarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

Then at step 262, the process checks if additional pegged guarantee sellorders exist and, in this example, that is the case. As such, theprocess proceeds to step 264 where it retrieves the next sell order,which is Guarantee Sell Order 6.

EXAMPLE 22 Update Guarantee Sell Order 6

Retrieved Guarantee Sell Order 6 looks like this:

-   -   →Guarantee Order 6: Sell @ Offer

The process returns to step 244, where it initially sets theCurrentOrderPrice parameter of Guarantee Sell Order 6 to $20.01, theNBO. Then at step 246, the process checks if Sell Order 6 has adiscretionary offset. As it does not in this example, the processcontinues to step 250. At step 250, the process checks if Guarantee SellOrder 6 has a peg offset. As it does not in this example, the processcontinues to step 254, where it checks if Guarantee Sell Order 6 has apeg limit. As it does not in this example, the process continues to step260, where it reinserts Guarantee Sell Order 6 in the guarantee orderbook in price/time priority according to its CurrentOrderPriceparameter.

At step 262, the process checks if additional pegged guarantee sellorders exist. In this example, there are additional pegged guaranteesell orders, so the process proceeds to step 264 where it retrieves thenext sell order, which is Guarantee Sell Order 7.

EXAMPLE 23 Update Guarantee Sell Order 7 (Peg Offset)

Retrieved Guarantee Sell Order 7 looks like this:

-   -   →Guarantee Order 7: Sell @ Offer, Peg Offset=+0.01

The process returns to step 244, where it initially sets theCurrentOrderPrice parameter of Guarantee Sell Order 7 to $20.01, theNBO. Then at step 246, the process checks if Guarantee Sell Order 7 hasa discretionary offset. As it does not in this example, the processcontinues to step 250. At step 250, the process checks if Guarantee SellOrder 7 has a peg offset. As it does in this example, the processcontinues to step 252, where it adds the Peg Offset (+0.01) to theCurrentOrderPrice parameter ($20.01) to derive the updatedCurrentOrderPrice parameter ($20.02).

The process continues to step 254, where it checks if Guarantee SellOrder 7 has a peg limit. As it does not in this example, the processcontinues to step 260, where it reinserts Guarantee Sell Order 7 in theguarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 262, the process checks if additional pegged guarantee sellorders exist, and finding this to be true in this example, proceeds tostep 264 where it retrieves the last sell order, which is Guarantee SellOrder 9.

EXAMPLE 24 Update Guarantee Sell Order 9 (Peg Offset+Peg Limit)

Retrieved Guarantee Sell Order 9 looks like this:

-   -   →Guarantee Order 9: Sell @ Offer, Peg Offset=+0.02, Peg        Limit=20.06

The process returns to step 244, where it initially sets theCurrentOrderPrice parameter of Guarantee Sell Order 9 to $20.01, theNBO. Then at step 246, the process checks if Guarantee Sell Order 9 hasa discretionary offset. As it does not in this example, the processcontinues to step 250. At step 250, the process checks if Guarantee SellOrder 9 has a peg offset. As it does in this example, the processcontinues to step 252, where it adds the Peg Offset (+0.02) to theCurrentOrderPrice parameter ($20.01) to derive the updatedCurrentOrderPrice parameter ($20.03).

The process then continues to step 254, where it checks if GuaranteeSell Order 9 has a peg limit. As it does in this example, the processcontinues to step 256, where it compares the CurrentOrderPrice parameter($20.03) to the Peg Limit ($20.06). As the CurrentOrderPrice parameteris lower than the Peg Limit, the process continues to step 258, where itresets the CurrentOrderPrice parameter equal to $20.06, which is the PegLimit. Then at step 260, the process reinserts Guarantee Sell Order 9 inthe guarantee order book in price/time priority according to itsCurrentOrderPrice parameter.

At step 262, the process checks if additional pegged guarantee sellorders exist, and finding none in this example, continues to step 266where the process is terminated. With the NBO at $20.01, the updatedguarantee order book looks like this:

Guarantee Order Book Offers Current Order Price Guarantee Order 8: Sell@ Offer − .01 20.00 Guarantee Order 6: Sell @ Offer 20.01 GuaranteeOrder 10: Sell @ Offer − .02, 20.02 Peg Limit = 20.02 Guarantee Order 7:Sell @ Offer + .01 20.02 Guarantee Order 9: Sell @ Offer + .02, 20.06Peg Limit = 20.06

It should be noted that Guarantee Sell Order 10 and Guarantee Sell Order7 currently have the same price ($20.02) because the Peg Limit onGuarantee Sell Order 10 imposed a floor price. Even if orders cannot besubmitted at the same limit price in this embodiment of the disclosure,multiple orders are permitted to momentarily be repriced at the sameprice as the NBBO fluctuates. As Guarantee Sell Order 10 was priced at$20.02 before Guarantee Sell Order 7 was, it has time priority.

While the disclosure has been discussed in terms of certain embodiments,it should be appreciated that the disclosure is not so limited. Theembodiments are explained herein by way of example, and there arenumerous modifications, variations and other embodiments that may beemployed that would still be within the scope of the present disclosure.

1. A method of providing an order sending firm and a designated marketmaker anonymity in a directed cross, comprising: providing a postingmarket center having an internal book and having a guarantee order book,wherein the guarantee order book is specified for a designated marketmaker to populate the guarantee order book with guarantee orders for aspecific order sending firm that is permissioned to send directed ordersto the designated market maker; receiving a plurality of guaranteeorders on the posting market center from the designated market makerintended for a specific order sending firm without the order sendingfirm knowing of the guarantee orders; populating the guarantee orderbook with the received plurality of guarantee orders; receiving adirected order on the posting market center directed to the designatedmarket maker from the order sending firm permissioned to send directedorders to the designated market maker; retrieving a marketable guaranteeorder from the guarantee order book; pairing the received directed orderwith the retrieved guarantee order; ranking the retrieved guaranteeorder in the internal book; presenting the received directed order tothe internal book; matching the received directed order with theretrieved guarantee order in price and time priority on the internalbook without the designated market maker having any notification of theincoming directed order and only seeing the execution of the retrievedguarantee order.
 2. The method of claim 1, wherein the posting marketcenter interacts with a plurality of designated market makers and ordersending firms; wherein the posting maker center has a plurality ofguarantee orders books and wherein each designated market maker createsa specific guarantee order book for each order sending firm that ispermissioned to send such designated market maker a directed order.